Explanation

The provided audited financial statements for Storm Guard Franchise Systems, LLC (Storm Guard) show positive and growing net worth, increasing cash reserves, and consistent profitability over the last three fiscal years. There are no disclosed signs of financial weakness, such as a 'going concern' note from the auditors. The company appears to have the financial resources to support the franchise system.

Potential Mitigations

• An experienced franchise accountant should still review the complete financial statements, including all footnotes, to confirm financial health and identify any subtle trends.
• During discussions with existing franchisees, inquire about their perception of the franchisor's financial commitment to brand growth and support.
• Your accountant can help you analyze the franchisor's revenue sources to assess the balance between potentially volatile franchise sales and more stable ongoing royalties.

Explanation

This risk was not identified in the FDD Package. The data in Item 20 does not show a period of excessively rapid growth; in fact, the system size has been relatively stable, with a net decrease in one of the last three years. Uncontrolled growth can strain a franchisor's ability to provide adequate support to its franchisees.

Potential Mitigations

• Your business advisor can help you evaluate the franchisor's strategic growth plans to ensure they are sustainable and supported by adequate infrastructure.
• Engaging with a range of franchisees, from new to established, can provide insight into the current quality and responsiveness of franchisor support.
• An accountant's review of the franchisor’s financial statements can help assess if they are investing sufficiently in support systems to handle future growth.

Explanation

This risk was not identified in the FDD Package. Storm Guard began franchising in 2011 and has over a decade of operational history. The system is established and cannot be considered new or unproven. A new system carries higher risks due to a lack of a track record, underdeveloped support systems, and minimal brand recognition.

Potential Mitigations

• A discussion with your business advisor can help you compare the franchisor's track record and brand maturity against other opportunities in the industry.
• It is still beneficial to speak with some of the earliest franchisees to understand how the system and its support have evolved over time.
• Your attorney can review the franchisor's history as disclosed in Item 1, including any predecessors, to confirm the length of its operating experience.

Explanation

This risk was not identified in the FDD Package. The franchise operates in the storm damage roofing and construction industry. This is a mature, needs-based service sector driven by weather events and property maintenance cycles, not a short-term trend or fad. Investing in a fad business carries the risk of declining consumer demand after the trend subsides.

Potential Mitigations

• A business advisor can help you conduct independent market research to confirm the long-term demand for restoration services in your specific geographic area.
• In discussions with the franchisor, inquire about their strategies for innovation and adaptation to changing building materials, regulations, and market conditions.
• Your financial advisor can help you assess the business model's resilience to economic cycles and factors beyond weather trends.

Explanation

This risk was not identified in the FDD Package. Item 2 discloses the backgrounds of the key executives, who appear to have considerable experience in franchising and/or the home services and construction industries. For example, the Chief Operating Officer is listed as having three decades of franchising experience. Inexperienced management can be a significant risk factor for a franchise system.

Potential Mitigations

• Asking existing franchisees about their direct experiences with the management team's competence, responsiveness, and strategic vision is a valuable due diligence step.
• A business advisor can assist you in researching the professional backgrounds and track records of the key executives mentioned in Item 2.
• It is still prudent to have your attorney review the management's history in conjunction with the litigation and bankruptcy disclosures in Items 3 and 4.

Explanation

This risk was not identified in the FDD Package. Item 1 does not indicate that Storm Guard is owned by a private equity firm. Ownership appears to be held by private individuals. Private equity ownership can sometimes lead to a focus on short-term returns over the long-term health of the franchise system, potentially affecting franchisee support and costs.

Potential Mitigations

• Your attorney can help you verify the ownership structure of the franchisor entity through public records.
• Discussions with long-term franchisees can provide insight into the consistency of the franchisor's philosophy and operational focus over time.
• It is useful to ask your business advisor to help you understand the franchisor's long-term vision and commitment to the brand, regardless of ownership structure.

Explanation

This risk was not identified in the FDD Package. The FDD discloses the franchisor entity and provides its audited financial statements. While affiliations with other companies are mentioned, there is no indication of a parent company whose financials would be required for a complete risk assessment. A lack of transparency regarding a controlling parent entity can obscure the true financial stability of a franchise system.

Potential Mitigations

• Your attorney can review the corporate structure disclosed in Item 1 to confirm there are no undisclosed parent entities that should have been included.
• An accountant should verify that the provided financial statements are for the correct legal entity that is offering you the franchise.
• Inquire with current franchisees about the role any affiliated companies play in the system's operations to ensure full transparency.

Explanation

This risk was not identified in the FDD Package. Item 1 properly discloses a predecessor entity and provides context on the transition of ownership. The FDD does not disclose any negative history, such as significant litigation or bankruptcy, associated with this predecessor. Concealing a troubled history from a predecessor would be a major red flag.

Potential Mitigations

• A business advisor could assist you in performing independent research, such as news and internet searches, on the predecessor entity for additional context.
• It is still a good practice to ask long-tenured franchisees about their experiences under any previous ownership or predecessor entity.
• Your attorney should confirm that the disclosures in Items 1, 3, and 4 related to the predecessor appear complete and compliant with regulations.

Explanation

This risk was not identified in the FDD Package. Item 3 explicitly states that there is no litigation that requires disclosure. This is a significant positive factor, as a pattern of lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, can be a strong indicator of systemic problems within a franchise.

Potential Mitigations

• Your attorney can conduct independent searches of court records to verify the accuracy of the 'no litigation' disclosure.
• Asking a broad sample of current and former franchisees about any disputes they may have had, even if not rising to the level of litigation, provides valuable insight.
• A business advisor can help you understand what typical litigation levels look like in similarly sized franchise systems for comparison.