Explanation

This risk was not identified in the FDD package. The system is showing steady, but not explosive, growth. However, rapid growth in any franchise system can strain its ability to provide adequate support. If a franchisor's support infrastructure does not keep pace with its unit growth, new franchisees may experience delays in training, site selection, and operational assistance, potentially impacting their launch and long-term success.

Potential Mitigations

• Your business advisor should help you evaluate the franchisor’s plans for scaling its support staff and infrastructure to match its growth projections.
• Speaking with both new and established franchisees can provide insight into whether support levels have remained consistent as the system has grown.
• An accountant's review of the franchisor's financials can help determine if they are reinvesting sufficiently in support infrastructure.

Explanation

This risk was not identified in the FDD package. Senior Care Authority, LLC (SCA) began franchising in 2014 and has over 100 outlets, indicating it is an established system. For new systems, risks are typically higher due to unproven business models, minimal brand recognition, and a lack of experienced franchisees to consult for due diligence. The absence of a long track record makes it difficult to assess the system's long-term viability and the franchisor's ability to provide effective support.

Potential Mitigations

• When evaluating a new franchise system, it is crucial that your franchise attorney scrutinizes the founders' experience in both the industry and in franchising.
• A thorough review of the new franchisor's capitalization with your accountant is essential to determine if they can fund their support obligations.
• Your business advisor can help you assess the strength and long-term viability of the unproven business model.

Explanation

This risk was not identified in the FDD package. The senior placement and consulting industry serves a long-term demographic trend rather than a fleeting interest. A fad business is one tied to a short-lived trend, which creates a significant risk that customer demand could evaporate, leaving you with a worthless business and ongoing contractual obligations. Evaluating the long-term sustainability of consumer demand for a product or service is a critical step in due diligence.

Potential Mitigations

• Your business advisor can help you conduct market research to assess whether a business concept is based on a sustainable consumer need or a temporary trend.
• Investigating the franchisor's plans for research, development, and system evolution is important to gauge adaptability to market changes.
• Discussing the long-term consumer demand with a financial advisor can help assess the investment's viability.

Explanation

This risk was not identified in the FDD package. The executives listed in Item 2 appear to have significant experience in franchising and the senior care industry. For instance, the President and COO was previously a franchisee of the system. Inexperienced management can be a major risk, as it may lead to flawed strategies, weak support systems, and a poor understanding of the franchisee-franchisor relationship, ultimately jeopardizing the entire system's stability and your investment.

Potential Mitigations

• When considering a franchise, a thorough vetting of the management team's resumes and track records with your business advisor is essential.
• It is important to ask existing franchisees about their direct experiences with the management team's competence and responsiveness.
• Consulting with your attorney can help you understand the potential impacts of management inexperience on the franchisor's contractual obligations.

Explanation

This risk was not identified in the FDD package. Item 1 indicates SCA is a limited liability company and does not disclose ownership by a private equity firm. When a franchisor is PE-owned, there can be a risk that decisions are driven by short-term profit motives, such as cutting franchisee support or forcing sales to affiliated vendors, to prepare the system for a quick sale. This can conflict with the long-term health of the brand and franchisee profitability.

Potential Mitigations

• In cases of PE ownership, your business advisor should research the firm’s reputation and its track record with other franchise brands.
• It is wise to ask existing franchisees if they have observed significant changes in support or strategy since a PE acquisition.
• Your attorney can help you understand any contractual clauses that facilitate an easy sale of the franchise system.

Explanation

This risk was not identified in the FDD package, as SCA does not appear to have a parent company. If a franchisor is a subsidiary, the parent company's financial health can be critical. A prospective franchisee should be cautious if the franchisor is a thinly capitalized entity and the parent company, which may control it, does not provide its own financial statements or a guarantee of the franchisor's obligations, as this could hide significant financial instability.

Potential Mitigations

• Your attorney should verify the franchisor's corporate structure to identify any undisclosed parent or controlling entities.
• If a parent company exists and provides essential support or guarantees, an accountant should review their financial statements for stability.
• Understanding the legal and financial relationship between a subsidiary franchisor and its parent is a critical discussion to have with your attorney.

Explanation

This risk was not identified in the FDD package. Item 1 states that the franchisor has no predecessors. A predecessor is a company from which the franchisor acquired the main assets of the business. Full disclosure of a predecessor's history, including any litigation, bankruptcy, or franchisee turnover, is required and crucial for due diligence. Incomplete disclosure can hide systemic problems that may have been inherited by the current franchisor, giving you an incomplete picture of the business's historical health.

Potential Mitigations

• It is important for your attorney to carefully review Item 1 for any mention of predecessors and their history.
• If a predecessor is identified, a business advisor can help you research its public records for any signs of trouble.
• Speaking with long-term franchisees who operated under a predecessor can provide invaluable, firsthand insight.

Explanation

This risk was not identified in the FDD package. Item 3 discloses no material litigation against the franchisor. A pattern of lawsuits filed by franchisees alleging fraud, misrepresentation, or breach of contract is a significant red flag. It can indicate systemic problems in the franchisor's sales process, operational support, or overall business model. Likewise, a high number of suits initiated by the franchisor against its franchisees might suggest an overly aggressive or litigious relationship.

Potential Mitigations

• When litigation is present, your attorney should carefully analyze the nature and outcomes of all disclosed cases.
• A business advisor can help you assess whether the number and type of lawsuits are normal for a system of its size and industry.
• It is crucial to ask current and former franchisees about any disclosed litigation to get their perspective.