Explanation

The risk that a franchisor is growing too quickly, potentially outpacing its ability to provide adequate franchisee support, was not identified. Rapid growth can strain a franchisor's resources. Evaluating the franchisor’s financial health in Item 21 against the growth rate shown in Item 20 is important to assess if their support infrastructure can keep pace with expansion.

Potential Mitigations

• Questioning the franchisor about their capacity and plans for scaling support infrastructure to match unit growth is a topic for discussion with your business advisor.
• Interviewing a broad range of existing franchisees about the current quality and responsiveness of franchisor support can provide valuable insight.
• An accountant should review the franchisor's financials in Item 21 to assess if they have the resources to support growth.

Explanation

This risk was not identified, as the real estate brokerage industry is well-established and not based on a fleeting trend. However, it is always important to assess a business concept's long-term consumer demand and its ability to adapt to market changes. A business tied to a fad faces the risk of declining interest, which could lead to failure even if you are contractually obligated for the full franchise term.

Potential Mitigations

• Assess the long-term market demand for the service in your specific area with your business advisor.
• Evaluate the franchisor's plans for innovation and adaptation by reviewing the services and support described in Item 11.
• Consider the business model's resilience to economic downturns with your financial advisor.

Explanation

This risk does not appear to be present. Item 2 indicates that the key executives, such as Andrew Cimerman and Lisa Gerdes, have extensive, long-term experience in the real estate industry and with the Realty World system itself. Lack of management experience can be a significant risk, as it may lead to poor strategic decisions and inadequate support for franchisees.

Potential Mitigations

• A business advisor can help you vet the management team's background and relevant experience as disclosed in Item 2.
• Speaking with existing franchisees about their confidence in the management team's leadership and strategic direction is a valuable due diligence step.
• It is always wise to ask the franchisor about the depth and expertise of the broader support team beyond the key executives listed.

Explanation

This risk was not identified. Item 1 and Item 2 do not indicate that a private equity firm owns the franchisor. This type of ownership can be a risk because key decisions might prioritize short-term investor returns over the long-term health of the franchise system. This could manifest as reduced franchisee support, increased fees, or pressure to use affiliated vendors.

Potential Mitigations

• Your attorney can help you verify the ownership structure disclosed in Item 1 of the FDD.
• It is good practice to ask existing franchisees if there have been any recent changes in ownership or strategic direction.
• A business advisor can help research the franchisor's ownership history for any past private equity involvement.

Explanation

This risk was not identified. Item 1 states that RWI has no parent company. When a franchisor is a subsidiary of a parent company, the parent's financial health can be critical. If a parent company's financials are not disclosed when they should be, it can obscure the true financial backing and stability of the franchise system, hiding potential risks from prospective franchisees.

Potential Mitigations

• Your attorney can help you verify the corporate structure disclosed in Item 1.
• If a parent company were involved, your accountant would be essential in reviewing its financial statements for any signs of weakness.
• In any franchise investment, it is important to understand the full corporate structure and any financial guarantees with your legal and financial advisors.

Explanation

This risk was not identified. Item 1 states that RWI has had no predecessor during the last 10 years. When a franchisor acquires a system from a predecessor, it's important to understand that predecessor's history. Inadequate disclosure can hide past issues like high failure rates, litigation, or bankruptcy, preventing a full assessment of the system's historical challenges.

Potential Mitigations

• Your attorney should always carefully review the predecessor information disclosed in Items 1, 3, and 4.
• If a predecessor were involved, researching their public track record would be a key due diligence step for your business advisor.
• Speaking with long-term franchisees who operated under a predecessor can provide invaluable historical context.