Explanation

This FDD package does not indicate a high rate of franchisee turnover. Item 20 data shows very few terminations or cessations of business in the last three years. Generally, high turnover can be a significant red flag, suggesting potential issues with the system's profitability, franchisor support, or the overall business model. A stable franchise system is a critical factor for long-term success.

Potential Mitigations

• Speaking with a significant number of former franchisees from the list in Item 20 is a crucial step your business advisor can help facilitate.
• An accountant should help you calculate the effective turnover rate from the data in Item 20's tables.
• Your attorney can help you formulate specific questions for the franchisor regarding any franchisee departures.

Explanation

This FDD package does not indicate the franchise system is undergoing rapid growth that might strain its support resources. The number of outlets disclosed in Item 20 has remained stable over the last three years. While controlled growth is positive, explosively rapid expansion can sometimes be a risk if a franchisor's support systems, such as training and field support, cannot keep pace with the increasing number of franchisees needing assistance.

Potential Mitigations

• Engaging a business advisor to research the franchisor's reputation for support can provide valuable external perspective.
• An accountant can analyze the franchisor's financial statements to determine if they are investing sufficiently in support infrastructure.
• It is beneficial to ask current franchisees about the quality and timeliness of the support they receive from the franchisor.

Explanation

This risk was not identified, as ProSource is a well-established franchise system. Item 1 indicates they have been franchising since 1991 and Item 20 shows a large number of operating units. Investing in a new or unproven system carries higher risks, as the business model may not be time-tested, brand recognition may be minimal, and the franchisor might lack the experience to provide effective, long-term support to its franchisees.

Potential Mitigations

• A business advisor can help you investigate the history and track record of any franchise system you consider.
• It's prudent to have an attorney review the FDD for any signs of inexperience, such as a lack of litigation history simply because the system is new.
• Your accountant should scrutinize the financials of a new franchisor for adequate capitalization.

Explanation

This risk was not identified. The ProSource model, focused on wholesale floorcovering, kitchen, and bath products for trade professionals since 1991, appears to be a well-established business concept rather than a fad. A fad-based business carries the risk that consumer interest may decline rapidly, leaving you with a long-term contractual obligation for a business with a short-term appeal.

Potential Mitigations

• A business advisor can help you research the long-term market trends for the specific industry to assess its stability.
• Analyzing the franchisor's plans for innovation and adaptation in Item 11 provides insight into their long-term vision.
• Consulting with long-tenured franchisees about the business's evolution and resilience through different economic cycles is a valuable exercise.

Explanation

This risk was not identified in the FDD. Item 2 shows that the franchisor's key executives and management personnel have extensive, long-term experience both within the ProSource system and the broader industry. Inexperienced management can be a significant risk, potentially leading to poor strategic decisions, weak operational systems, and inadequate support for franchisees. The disclosed leadership team here appears to be seasoned.

Potential Mitigations

• A business advisor can help you independently verify the backgrounds of key executives mentioned in Item 2.
• It is useful to ask current franchisees about their direct experiences and opinions of the management team's competence and accessibility.
• Your attorney should review management's franchising experience specifically, as it is a different skill set than just industry experience.

Explanation

This risk is not present. The franchisor is a subsidiary of CCA Global Partners, Inc. (CCA). The FDD clearly discloses this relationship in Item 1. Importantly, the franchisor includes the audited financial statements of CCA as Exhibit B and provides a Guarantee of Performance from CCA in Exhibit E. This level of transparency provides a more complete picture of the financial backing and stability of the system.

Potential Mitigations

• An attorney can confirm if the parent company's financials are required and have been properly disclosed.
• It is crucial for your accountant to analyze the financials of both the franchisor and any guaranteeing parent company.
• Your attorney should verify that any guarantee from a parent company is legally binding and properly executed.

Explanation

This risk was not identified. Item 1 of the FDD does not disclose any predecessors from which the franchisor acquired the business. The history provided suggests a consistent ownership and operational lineage under the ProSource name. When a franchise has predecessors, it is important to investigate their history for any signs of instability, high franchisee turnover, or litigation that could indicate underlying problems with the system you are buying into.

Potential Mitigations

• Your attorney can help you investigate the history of any disclosed predecessor entities for past issues like bankruptcy or litigation.
• Engaging a business advisor to search for news articles or online discussions about a predecessor can reveal potential reputational problems.
• Asking long-term franchisees about their experience under any previous ownership is an invaluable part of due diligence.

Explanation

This risk was not identified. Item 3 discloses one past regulatory consent order from 2003 but reports no other required litigation disclosures. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems. The absence of such a pattern in this FDD is a positive sign, suggesting a more stable and less contentious relationship between the franchisor and its franchisees.

Potential Mitigations

• An attorney should always carefully review the nature and outcome of any disclosed litigation in Item 3.
• A business advisor can help you conduct independent online searches for any litigation that may not have required disclosure.
• It is important to ask current and former franchisees about any past or pending legal disputes they are aware of.