Explanation

This risk was not identified in the FDD package. Rapid system growth can strain a franchisor's ability to provide adequate support to all its franchisees. A system expanding too quickly might not have the infrastructure or personnel to handle the needs of its growing network, potentially leading to a decline in the quality of training, marketing, and operational assistance for everyone.

Potential Mitigations

• Your accountant should review the franchisor's financials in Item 21 to assess if they have the capital and cash flow to support their growth rate.
• A business advisor can help you analyze the rate of new unit openings in Item 20 against the size of the franchisor's support staff.
• It is wise to ask both new and established franchisees about the quality and timeliness of the support they currently receive.

Explanation

This risk was not identified in the FDD package. The franchisor began franchising in 2016 and its management team appears to have experience in the commercial real estate industry. However, investing in any system, especially one that is not a decades-old household name, carries some risk. Newer systems may have less brand recognition and their support systems may be less developed than those of more mature franchise brands.

Potential Mitigations

• A business advisor can help you research the franchisor's history and the track record of its key executives in both franchising and the specific industry.
• Speaking with the earliest-joining franchisees can provide valuable insight into how the system and its support have evolved.
• Your accountant should carefully assess the franchisor's financial stability and capitalization as disclosed in Item 21.

Explanation

This risk was not identified in the FDD package. The business model is focused on commercial real estate brokerage services, which is an established industry. However, it's important to consider how market cycles and economic conditions might affect this specific business. A fad business, tied to a short-lived trend, can leave you with a long-term contract for a business with declining consumer demand.

Potential Mitigations

• You should conduct your own market research to gauge the long-term consumer demand for the services offered.
• A business advisor can help you evaluate the business's resilience to economic shifts and changing market trends.
• It is beneficial to ask the franchisor about their plans for future innovation and adaptation to stay relevant.

Explanation

This risk was not identified in the FDD package. The management team listed in Item 2 appears to have prior experience in the commercial real estate industry. When a franchisor's management lacks experience in franchising or their specific industry, it can lead to challenges in providing effective support, training, and strategic direction. This can negatively impact the entire system and your potential for success.

Potential Mitigations

• It is always prudent to research the professional backgrounds of the key executives listed in Item 2.
• A conversation with existing franchisees can provide insight into their confidence in the management team's leadership and support.
• Your business advisor can assist in evaluating whether the management team's skills align with the needs of a growing franchise system.

Explanation

This risk was not identified in the FDD package. The FDD does not indicate ownership by a private equity firm. When a PE firm owns a franchisor, there can be a focus on short-term profitability and a quick exit strategy. This might lead to decisions, such as cost-cutting on support or increasing fees, that benefit investors but may not align with the long-term health of franchisees' businesses.

Potential Mitigations

• If a franchisor is owned by a private equity firm, your business advisor should research the firm's reputation and its track record with other franchise brands.
• It is beneficial to ask franchisees who have been in the system through the ownership change about any shifts in culture or support.
• Your attorney can review the assignment clause in the Franchise Agreement to understand your rights if the system is sold.

Explanation

This risk was not identified in the FDD package. The FDD discloses that there is no parent company. When a franchisor is a subsidiary of a larger parent company, the parent's financial health can be crucial. If the parent's financials are not disclosed when required (e.g., if they guarantee the franchisor's performance), you may lack a complete picture of the overall financial stability and resources backing your franchise.

Potential Mitigations

• Your attorney should verify the corporate structure to confirm the relationship between the franchisor and any affiliated companies.
• If a parent entity exists and provides guarantees, an accountant should review its financial statements for signs of strength or weakness.
• Understanding any financial or operational dependencies on a parent company is a key piece of due diligence for your business advisor.

Explanation

This risk was not identified in the FDD package. The franchisor states it has no predecessor. When a franchisor has acquired a business from a predecessor, it's important to understand that history. Any undisclosed or downplayed issues from the predecessor, such as litigation or high franchisee failure rates, could carry over and affect the current system, giving you an incomplete picture of the risks involved.

Potential Mitigations

• Your attorney should carefully review Item 1 for any mention of predecessors and their business history.
• If a predecessor is mentioned, speaking with long-term franchisees who operated under the previous ownership is a valuable due diligence step.
• A business advisor can help you conduct independent research on a predecessor's history if one is disclosed.

Explanation

This risk was not identified in the FDD package. The franchisor discloses no material litigation. A pattern of lawsuits in Item 3, especially those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may suggest systemic problems in the franchise relationship, poor support, or unmet promises. Similarly, a high volume of lawsuits initiated by the franchisor against franchisees could indicate an overly aggressive or litigious culture.

Potential Mitigations

• It is always a good practice to have your attorney review the litigation history in Item 3 of any FDD.
• Even if no litigation is disclosed, asking current franchisees about any disputes within the system can provide valuable context.
• Understanding the nature of past or pending lawsuits is a critical step for your attorney in assessing a franchisor's character.