Explanation

As a new franchise system that only began offering franchises in late 2023, there are no existing or former franchisees to report in the turnover tables. While this means there is no history of turnover, it also indicates that the system is entirely unproven with third-party operators. You would be one of the first franchisees, which carries a higher level of risk regarding the model's viability and the franchisor's ability to provide support.

Potential Mitigations

• It is critical to discuss the higher risks associated with being a foundational franchisee with your attorney and business advisor.
• Engage your accountant to perform a highly conservative financial analysis, as there is no franchisee performance data to rely on.
• Ask the franchisor for access to the management of their single company-owned affiliate outlet to discuss operations.

Explanation

The risk of a franchisor's support systems being strained by excessively rapid growth was not identified. Item 20 shows that the franchisor has not yet sold any franchises. Therefore, the system is not currently experiencing rapid growth. This risk becomes more relevant if the franchisor begins selling a large number of units quickly in the future, which could challenge their ability to provide adequate training and support to all franchisees.

Potential Mitigations

• Working with your business advisor can help you monitor the franchisor's growth rate and assess their capacity to support new units.
• Your attorney can review the franchise agreement for any commitments regarding support levels as the system expands.
• An accountant can analyze the franchisor's future financial statements for investments in support infrastructure.

Explanation

This risk was not identified in the FDD package. The business model, providing rooftop landscape and amenity installation for commercial and multi-unit residential properties, appears to be a specialized niche within the larger, established landscaping and construction industries. It does not seem to be based on a short-term trend or fad, but rather on utilizing previously unused space in urban environments, which is a continuing development trend.

Potential Mitigations

• Conducting your own market research with a business advisor is a good way to gauge long-term demand for the services in your area.
• Your financial advisor can help you assess the business model's resilience to economic shifts.
• Reviewing industry publications can help you and your business advisor understand the long-term outlook for this type of service.

Explanation

This risk was not identified in the FDD package. Item 1, which details the franchisor's corporate structure and history, does not indicate that Terrace Up or its affiliates are owned or controlled by a private equity firm. The ownership appears to reside with the individuals identified in Item 2. Therefore, risks specifically associated with a private equity ownership model, such as a focus on short-term returns over franchisee health, do not appear to be present here.

Potential Mitigations

• Your attorney can help you verify the corporate ownership structure through public records.
• Engaging a business advisor to research the backgrounds of the individual owners can provide additional insight into their business philosophy.
• An accountant can review the financial statements for any signs of debt or equity structures typical of PE involvement.

Explanation

This risk was not identified in the FDD package. Terrace Up does not appear to have a parent company. Item 1 details a network of affiliated companies, but none are identified as a parent. Since the franchisor is a startup, FTC rules do not require audited financials from affiliates unless they guarantee performance, which is not the case here. Disclosures seem compliant with the rules regarding parent and affiliate companies.

Potential Mitigations

• Your attorney can review Item 1 and Item 21 to confirm compliance with disclosure rules regarding parent and affiliate companies.
• An accountant can help you understand the financial relationships between the franchisor and its affiliates.
• A business advisor can help you analyze the potential risks and benefits of the disclosed affiliate structure.

Explanation

This risk was not identified in the FDD package. According to Item 1, Terrace Up is a newly formed entity and has no predecessors. Therefore, there are no risks associated with a predecessor's negative history, such as litigation, bankruptcy, or high franchisee turnover. The risks present are those of a new company, which are addressed under other risk categories.

Potential Mitigations

• Your attorney can verify the franchisor's statement about having no predecessors.
• A business advisor can help you understand the difference between risks from a predecessor and risks from a new franchisor.
• An accountant's review of the franchisor's startup financials provides the most relevant insight into its stability.

Explanation

This risk was not identified in the FDD package. Item 3 states that no litigation is required to be disclosed. This means that neither the franchisor nor its key personnel are currently involved in, or have recently concluded, legal actions related to fraud, franchise law violations, or other material claims. This absence of litigation is a positive factor, although it is expected for a brand-new franchise system that has not yet had interactions with franchisees.

Potential Mitigations

• Your attorney can perform an independent public records search to verify the accuracy of the 'no litigation' disclosure.
• A discussion with your business advisor can help you understand what types of litigation are common in franchising.
• Even without disclosed litigation, asking the franchisor about their dispute resolution philosophy is a worthwhile exercise.