Explanation

This specific risk was not identified in the FDD package. As a new system, Puddle Pool has very limited history, with only one franchised outlet operating and no reported terminations, non-renewals, or closures in Item 20. However, high franchisee turnover is a critical red flag in established systems, often indicating problems with profitability, support, or the business model itself, which you should scrutinize when reviewing any FDD.

Potential Mitigations

• It is wise to have your accountant help you analyze the Item 20 tables in any FDD to calculate the annual turnover rate.
• Speaking with former franchisees is a crucial due diligence step that a business advisor can help facilitate.
• Your attorney can help you understand the context behind any disclosed terminations or closures.

Explanation

This risk was not identified. The franchise offers professional residential and commercial pool cleaning and maintenance services. This is a well-established service industry with consistent demand, particularly in certain climates, and is not considered a fad. A fad business, tied to a fleeting trend, poses a risk of collapsing demand, leaving you with a long-term contract for a short-term business opportunity.

Potential Mitigations

• When evaluating any franchise, it is prudent to have a business advisor help you assess the long-term market demand for its products or services.
• Reviewing the franchisor’s plans for innovation and adaptation can also provide insight into its long-term viability.
• An accountant can help model the business's resilience to economic shifts.

Explanation

There is no indication in Item 1 or elsewhere that Puddle Pool is owned by a private equity firm. This type of ownership can introduce risks, as PE firms may prioritize short-term returns over the long-term health of the franchise system, potentially leading to increased fees, reduced support, or a quick sale of the brand, which can create instability for franchisees.

Potential Mitigations

• A business advisor can help you research the ownership structure of any franchisor.
• Your attorney should review the assignment clauses in the Franchise Agreement to understand your rights if the system is sold.
• Speaking with franchisees of other brands owned by the same PE firm can offer valuable insights.

Explanation

This risk was not identified. Item 1 discloses affiliated companies but does not indicate the existence of a parent company for Puddle Pool. In some cases, a franchisor might be a subsidiary of a larger parent, and the parent's financial health can be crucial. A failure to disclose a required parent's information could obscure financial weaknesses or other risks.

Potential Mitigations

• Your attorney should review the corporate structure disclosed in Item 1 to ensure all required parent and affiliate entities are listed.
• If a parent company's guarantee is offered, it's critical that your accountant reviews that parent's financial statements.
• A business advisor can help investigate the relationships between affiliated companies.

Explanation

This risk does not apply, as Item 1 of the FDD states that Puddle Pool has no predecessor company. When a franchisor acquires a business from a predecessor, it's important to investigate that predecessor's history for any signs of trouble, such as litigation or high franchisee failure rates, as these issues could be inherited by the new franchisor and affect the system's health.

Potential Mitigations

• For any franchise with a disclosed predecessor, your attorney should carefully examine Items 1, 3, and 4 for details about its history.
• It's also wise to have a business advisor help research the predecessor's public reputation and performance.
• Speaking with franchisees who operated under the predecessor can provide invaluable firsthand accounts.

Explanation

Item 3 of the FDD discloses no litigation involving the franchisor, its predecessors, or key management. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems. Similarly, a high volume of lawsuits initiated by the franchisor against franchisees might suggest an overly aggressive or unsupportive culture.

Potential Mitigations

• It's essential that your attorney carefully reviews the details of any disclosed litigation in Item 3.
• A business advisor can help you research public records for any litigation not required to be disclosed.
• Speaking with franchisees involved in past or pending litigation can provide critical context.