Explanation

This risk was not identified in the FDD. Low franchisee turnover can be an indicator of system health and franchisee satisfaction. High turnover, conversely, may suggest systemic issues such as a lack of profitability, poor franchisor support, or an unsustainable business model. The data for Servpro Franchisor, LLC (Servpro) shows a very low rate of terminations and non-renewals relative to the system's size, alongside consistent growth in the number of franchised outlets.

Potential Mitigations

• An accountant can help you calculate and analyze the annual turnover rates from Item 20 tables to compare them against industry averages.
• Speaking with former franchisees listed in Item 20 is a vital due diligence step your business advisor can help you prepare for.
• Your attorney should review any footnotes in Item 20 that might explain the reasons for outlets leaving the system.

Explanation

This risk was not identified. The FDD shows strong, steady growth in the number of franchised outlets over the past three years. While very rapid expansion can sometimes strain a franchisor's support systems, the growth here appears mature and controlled, suggesting it is not outpacing the company's ability to provide adequate services. Uncontrolled growth can be a risk if a franchisor lacks the infrastructure to support a rapidly expanding network, potentially diluting support for all franchisees.

Potential Mitigations

• A business advisor can help you analyze the growth rate in Item 20 in conjunction with the franchisor's support staff numbers in Item 2.
• During conversations with existing franchisees, it is useful to inquire about their perception of the quality and timeliness of franchisor support.
• Reviewing the franchisor's financial statements in Item 21 with an accountant may provide insight into their investment in support infrastructure.

Explanation

This risk was not identified. The FDD package indicates that the Servpro system is well-established, with a long operational history and a large number of existing franchisees. An unproven system can present higher risks, including an untested business model, undeveloped support structures, and minimal brand recognition. Servpro, however, is a mature and widely recognized brand, which can reduce some of these initial business risks for a new franchisee.

Potential Mitigations

• Even with a mature system, a business advisor should help you evaluate the brand's current market position and competitive landscape.
• Your accountant should still review the franchisor's financial health in Item 21 to ensure continued stability.
• A franchise attorney can help you understand all contractual obligations, which can be extensive in a mature system.

Explanation

This risk was not identified. The business model, focused on property damage restoration and cleaning, addresses a consistent and recurring need driven by events like fires, floods, and storms, rather than a short-term trend. A business based on a fad carries the risk of declining consumer interest, which could jeopardize your long-term investment. Servpro's services cater to enduring market demands in the property casualty and maintenance industries, suggesting a sustainable business model.

Potential Mitigations

• It is still beneficial to have a business advisor help you research the local market demand and competitive environment for restoration services.
• An accountant can assist you in creating long-term financial projections based on the stable nature of the industry.
• Discussing the long-term outlook for the restoration industry with current franchisees can provide valuable insight.

Explanation

This risk was not identified. FDD Item 2 shows that the key management personnel have extensive and relevant experience, both within the Servpro system and in other large, comparable service-based companies. Inexperienced management can be a significant risk, potentially leading to poor strategic decisions and inadequate support. The demonstrated depth of experience in Servpro's leadership team suggests a stable and knowledgeable operational direction for the franchise system.

Potential Mitigations

• Your business advisor can help you research the professional backgrounds of the key executives listed in Item 2.
• When speaking with franchisees, it is a good practice to inquire about their perception of the management team's competence and vision.
• Your attorney can advise on how management's stability may impact the franchisor's long-term contractual performance.

Explanation

This risk was not identified. The FDD package clearly discloses the parent companies and the overall corporate structure, including the role of Servpro Industries, LLC as the manager. It also provides the audited financial statements for both the franchisor (Servpro Franchisor, LLC) and the manager (Servpro Industries, LLC). Failure to disclose a parent company or provide its financials when required can obscure significant risks about who truly controls the system and their financial stability.

Potential Mitigations

• It's crucial to have your franchise accountant review the financials of all disclosed parent and affiliate entities, not just the franchisor.
• Your attorney can help you understand the legal relationship and obligations between the franchisor, its manager, and any parent guarantors.
• Always verify with the franchisor that you have received all relevant financial disclosures for any entity that guarantees performance or is a sole source supplier.

Explanation

The FDD in Item 1 identifies Servpro Industries, LLC as a predecessor. This entity was the franchisor of the system from 1977 until October 2019. The FDD appears to properly incorporate the historical data related to litigation (Item 3) and bankruptcy (Item 4) for this predecessor. A lack of clear information about predecessors can hide a history of problems, but the disclosure here seems to provide the required lineage and historical context for the system.

Potential Mitigations

• A franchise attorney should review the predecessor disclosures in Items 1, 3, and 4 to ensure they are complete.
• When speaking with long-term franchisees, asking about their experience under the predecessor's management can provide valuable context.
• A business advisor can help you research the predecessor's historical reputation if you have further concerns.

Explanation

FDD Item 3 discloses one pending lawsuit filed by the franchisor against a former franchisee for breach of contract, including enforcement of non-compete obligations. The former franchisee has filed a counterclaim. While a single case does not constitute a pattern, litigation is inherently costly and uncertain. A pattern of franchisee-initiated lawsuits alleging fraud or franchisor-initiated suits to enforce system standards could be a significant red flag about the health of the franchise relationship.

Potential Mitigations

• Your attorney should carefully analyze the nature of any disclosed litigation in Item 3 to understand its potential relevance to you.
• When speaking with current and former franchisees, it is useful to ask about the franchisor's general approach to dispute resolution.
• A business advisor can help you assess whether the litigation points to any underlying operational or relationship issues within the system.