Explanation

The risk of high franchisee turnover was not identified, as Item 20 shows no terminations, non-renewals, or other cessations. However, this is a brand new franchise system with only three operating units, so the data is not statistically significant. High turnover in a mature system can signal systemic problems, such as a lack of profitability or poor franchisor support, which are critical factors to assess when considering any franchise opportunity.

Potential Mitigations

• When evaluating any franchise, having an accountant analyze Item 20 turnover tables over a three-year period is essential to gauge system health.
• Engaging a business advisor to help you contact a broad range of current and former franchisees can provide invaluable insight into franchisee satisfaction.
• Your attorney can help you understand the different categories of departure and what they might imply about the franchisor's practices.

Explanation

This risk was not identified in the FDD package. The franchise system is new and small, with only three units, so rapid growth is not currently a factor. In general, a franchisor that sells franchises too quickly can strain its ability to provide adequate training, site selection assistance, and ongoing support to all its new franchisees. This can lead to operational issues and franchisee dissatisfaction across the system.

Potential Mitigations

• Before investing, your business advisor can help you assess whether a franchisor's support infrastructure seems capable of handling its growth plans.
• Speaking with both new and established franchisees can reveal if the quality of support has changed as the system has grown.
• An accountant's review of the franchisor's financials can help determine if they are reinvesting in support systems.

Explanation

This risk was not identified in the FDD package. The business operates in the established roofing and home services industry. A fad business is one tied to a fleeting trend, which can present a significant risk. If consumer interest wanes, franchisees can be left with a worthless business while still being bound by their franchise agreement, including the obligation to pay royalties on a business with declining sales.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term consumer demand for a franchise's products or services.
• Evaluating a franchisor's plans for innovation and adaptation can provide insight into the business's long-term viability.
• An accountant can help you model the financial risks of a business that may have a short life cycle.

Explanation

This risk was not identified in the FDD package, as Item 1 does not indicate ownership by a private equity firm. When a franchisor is owned by a PE firm, there is a potential risk that decisions may prioritize short-term investor returns over the long-term health of franchisees. This can sometimes manifest as reduced support, increased fees, or a quick sale of the franchise system, which could change the nature of your relationship with the brand.

Potential Mitigations

• If considering a PE-owned franchise, having your business advisor research the firm's history with other franchise brands is wise.
• Your attorney should review the franchise agreement for any terms that would be concerning in the event of a sale of the system.
• Speaking with franchisees who have been with the system before and after a PE acquisition can provide valuable insight.

Explanation

This risk was not identified in the FDD package. Item 3 discloses that there is no litigation required to be disclosed. A pattern of litigation, particularly lawsuits filed by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may suggest systemic problems within the franchise, such as unfulfilled promises by the franchisor or fundamental flaws in the business model.

Potential Mitigations

• Your attorney should always carefully review the details of any disclosed litigation in Item 3.
• Even with no disclosed litigation, your business advisor can help you conduct online searches for news or discussions involving the franchisor.
• Speaking with former franchisees can sometimes reveal disputes that did not escalate to litigation but are still important to know about.