Explanation

The FDD discloses franchisee turnover rates, including terminations, non-renewals, and other cessations. For 2024, the total number of units that left the system for these reasons was 16, representing approximately 5.1% of the outlets at the start of the year. While this rate does not appear unusually high, understanding the reasons behind these departures is a crucial part of your due diligence.

Potential Mitigations

• It is strongly recommended that you contact former franchisees listed in Exhibit F to discuss their experiences and reasons for leaving the system.
• Your business advisor can help you analyze the turnover data over the three years provided to identify any concerning trends.
• Discussing the circumstances of these departures with the franchisor can provide additional context; your attorney can help frame these questions.

Explanation

This risk was not identified in the FDD Package. The system's growth appears to be steady and managed rather than explosive, with a net increase of 17 outlets in 2024. Rapid growth can sometimes strain a franchisor's ability to provide adequate support. You should still evaluate if the support infrastructure is robust enough for the current and projected number of franchisees.

Potential Mitigations

• Engaging a business advisor can help you assess if the franchisor's support infrastructure is adequate for its current size and planned growth.
• Questioning current franchisees about the quality and timeliness of support is a critical due diligence step.
• Your accountant can review the franchisor's financials to assess if they are investing sufficiently in support systems to match growth.

Explanation

This risk was not identified in the FDD Package. The franchisor's predecessor has been offering franchises since 1981, and the system is mature with over 300 outlets currently in operation. An unproven system can present risks related to untested business models and underdeveloped support structures. This franchise appears to have a long operating history, which can provide a more predictable framework for new franchisees.

Potential Mitigations

• Speaking with long-tenured franchisees can provide valuable insight into the system's evolution and stability.
• A business advisor can help you evaluate how a mature system's brand recognition and established processes might benefit your new business.
• Your attorney should still review the entire agreement for terms that may be outdated or unfavorable despite the system's maturity.

Explanation

This risk was not identified in the FDD Package. The business of property restoration and cleaning is a long-standing, needs-based service industry driven by events like water or fire damage, rather than a short-term trend. A fad business carries the risk of declining consumer interest, which could jeopardize your long-term investment. This business model appears to be based on a consistent, ongoing market demand.

Potential Mitigations

• A business advisor can help you research the local market demand and competitive landscape for restoration services.
• Discussing the industry's stability and long-term outlook with your accountant can inform your financial projections.
• It's still valuable to ask existing franchisees about the sustainability of the business model in their specific territories.

Explanation

This risk was not identified in the FDD Package. The management team disclosed in Item 2 appears to have extensive experience in the restoration industry and in managing franchise systems. Inexperienced leadership can pose a risk through potential strategic errors or inadequate support. The backgrounds of the key personnel listed suggest a deep understanding of the business and franchising, which can be a significant asset for franchisees.

Potential Mitigations

• It is still beneficial to discuss your impressions of the management team's competence and vision with current franchisees.
• A business advisor can help you evaluate how the leadership team's specific experience aligns with your business goals.
• Confirming the roles and responsibilities of the key executives with the franchisor can provide clarity on who will support you.

Explanation

This risk was not identified in the FDD Package. The FDD discloses a complex parent company structure, but it also provides the audited financial statements for the parent guarantor, Neighborly Assetco LLC. The failure to disclose a parent entity or its financials when required can hide significant risks. In this case, the disclosure appears to provide the necessary information for a prospective franchisee to evaluate the financial backing of the system.

Potential Mitigations

• It is crucial for your accountant to review the financial statements of both the manager and the parent guarantor to get a complete picture.
• Your attorney should analyze the legal relationship between the franchisor, the manager, and the parent guarantor.
• Understanding the specifics of the Parent Guarantee in Exhibit D with your attorney is important to know what obligations are backed.

Explanation

This risk was not identified in the FDD Package. The franchisor, Rainbow International SPV LLC (Rainbow LLC), discloses its predecessor and provides information on its history. While any change in ownership can introduce new dynamics, there are no immediate red flags such as a history of bankruptcy or significant litigation associated with the predecessor disclosed in Items 3 and 4 that would suggest inherited systemic problems.

Potential Mitigations

• It's always wise to ask long-tenured franchisees about their experiences under any previous ownership or management.
• A business advisor can help research the public reputation of any predecessor entities for a more complete history.
• Your attorney should confirm that the transfer of assets and obligations from the predecessor to the current franchisor was handled properly.