Explanation

This risk was not identified in the FDD package. Sir Grout Franchising, LLC began offering franchises in 2007, indicating it is an established system rather than a new or unproven one. Unproven systems carry higher risks, as their business model, brand recognition, and support structures may be underdeveloped, increasing the potential for franchisee failure. It is generally safer to invest in a system with a longer, more stable operating history.

Potential Mitigations

• When evaluating any franchise, have a business advisor help you assess the maturity of the brand and its operating systems.
• Reviewing Item 20 data for multiple years with your accountant can provide insight into the system's stability and growth history.
• Your attorney can help you understand the legal history of the franchisor by reviewing Item 3 for litigation patterns.

Explanation

This risk was not identified in the FDD package. The business of grout and tile restoration is a standard, established category within the home services industry. A 'fad' business is one tied to a fleeting trend, which carries the risk that consumer demand could disappear, leaving you with obligations under a long-term franchise agreement for a business that is no longer viable. Sir Grout's services appear to address a consistent market need.

Potential Mitigations

• With any franchise concept, it is wise to conduct independent market research to assess long-term consumer demand with a business advisor.
• Evaluating a company's plans for innovation and adaptation to market changes is a prudent step your financial advisor can assist with.
• Your attorney can review the franchise agreement to understand your obligations if the business becomes unviable.

Explanation

This risk was not identified in the FDD package. The executive biographies in Item 2 show that key personnel have prior experience in franchising, private equity, and other relevant business sectors. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, inadequate franchisee support, and an unrefined operating system. The management team for Sir Grout appears to have relevant, high-level business experience.

Potential Mitigations

• A business advisor can help you research the backgrounds of the key executives of any franchise system you consider.
• Speaking with current franchisees about their perception of management's competence and support is a critical due diligence step.
• Your attorney should review the franchisor's obligations in the Franchise Agreement to ensure support commitments are clearly defined.

Explanation

This risk was not identified. The FDD properly discloses the parent company, Threshold Brands, LLC, and the ultimate parent and guarantor, HS Group Holding Company, LLC, in Item 1. Furthermore, the audited consolidated financial statements of the parent guarantor are provided in Exhibit G as required. Proper disclosure of parent companies is critical for assessing the true financial backing and stability of the franchisor entity, especially when the franchisor itself is a subsidiary with limited assets.

Potential Mitigations

• Your attorney should always verify that the FDD properly discloses any parent or affiliate entities that have guarantees or material roles.
• An accountant should confirm that if a parent's financials are required, they are provided and meet proper accounting standards.
• Always ask your business advisor to help you understand the complete corporate structure and how it might impact you.

Explanation

This risk was not identified in the FDD package, as Item 1 states there are no predecessors to disclose. A predecessor is a company from which the franchisor acquired the major portion of its assets. When a predecessor exists, it is important to review their history for issues like litigation, bankruptcy, or high franchisee turnover, as these could indicate underlying problems that may have been inherited by the current franchisor. A clean predecessor history is a positive sign.

Potential Mitigations

• When reviewing any FDD, ask your attorney to pay close attention to the predecessor history disclosed in Items 1, 3, and 4.
• If a predecessor is disclosed, a business advisor can help you conduct independent research on their historical performance and reputation.
• Speaking with long-term franchisees who operated under a predecessor can provide invaluable, firsthand insight.

Explanation

This risk was not identified, as Item 3 states that no litigation is required to be disclosed. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag indicating systemic problems. Similarly, a high volume of lawsuits initiated by the franchisor against franchisees might suggest an overly aggressive or litigious culture. The absence of such litigation is a positive indicator for the system.

Potential Mitigations

• Your attorney should always carefully scrutinize Item 3 of any FDD for patterns of litigation.
• Even if no litigation is disclosed, a business advisor can help you conduct online searches for news articles or franchisee complaints.
• In your discussions with former franchisees, it is wise to ask about any legal disputes they may be aware of.