Explanation

The risk of high franchisee turnover was not identified, as Item 20 shows only one franchisee and no terminations or non-renewals. High turnover can signal systemic problems, such as unprofitability or poor support. While low turnover is typically positive, in this case the extremely small system size points to a separate risk related to the brand being new and unproven, which is addressed in the 'New/Unproven Franchise System' risk.

Potential Mitigations

• With your business advisor, you should still contact the single franchisee listed in Exhibit E-1 to understand their experience.
• An accountant can help you analyze the Item 20 tables in any FDD to calculate the true rate of churn.
• Always ask a franchisor to explain the reasons for any significant number of terminations or ceased operations, with guidance from your attorney.

Explanation

This risk was not identified, as the system is not experiencing rapid growth; it has only one operating franchise. Rapid growth can strain a franchisor's ability to provide adequate support. While not a current risk here, the extremely slow growth presents its own challenges regarding brand recognition and system development, which should be considered as part of the 'New/Unproven Franchise System' risk.

Potential Mitigations

• When evaluating any franchise, have your accountant review the franchisor's financials in Item 21 to assess if they have the capital to support growth.
• Engaging a business advisor can help you question a franchisor about their capacity and plans for scaling support infrastructure.
• Consulting with a range of existing franchisees about the current quality and responsiveness of support is a key due diligence step.

Explanation

This risk was not identified. Home inspection is an established industry with consistent demand tied to the real estate market, not a temporary trend. However, you should evaluate the specific business model and its competitive advantages within this established industry. Success depends on factors like marketing, service quality, and local real estate activity rather than the fleeting popularity of the service itself.

Potential Mitigations

• With a business advisor, assess the long-term market demand for home inspection services in your specific territory.
• Evaluating the franchisor's plans for innovation and adaptation in Item 11 can provide insight into its long-term strategy.
• Your financial advisor can help you consider the business model's resilience to shifts in the real estate market and economic downturns.

Explanation

This risk was not identified in the FDD. Item 1 does not indicate that the franchisor or its parent companies, Loyalty Franchising LLC and Loyalty, LLC, are owned by a private equity firm. The ownership structure appears to be a standard corporate hierarchy. Therefore, the specific risks associated with a private equity firm's typical investment horizon and focus on short-term returns may not be present here.

Potential Mitigations

• In any franchise review, it is wise to research the ownership structure with a business advisor to understand who makes ultimate decisions.
• An attorney can help you assess any 'Assignment by Franchisor' clauses to understand what happens if the system is sold.
• Always ask existing franchisees about any changes in support or fees that occurred after a change in ownership.

Explanation

This risk was not identified. Item 1 clearly discloses the parent companies, Loyalty Franchising LLC and Loyalty, LLC. Item 21 includes the financial statements for the franchisor entity, The Inspection Boys Franchise USA LLC, as required. Since the parent companies do not appear to guarantee the franchisor's obligations, their financials are not provided or required. The primary risk stems from the disclosed weakness of the franchisor's own financials.

Potential Mitigations

• Your attorney should always verify the corporate structure disclosed in Item 1 and determine if any parent guarantees exist.
• If a parent company does guarantee obligations, your accountant should insist on reviewing its financial statements for a complete risk picture.
• Understanding the relationships between the franchisor and all affiliated companies mentioned in Item 1 is a key part of due diligence with your attorney.

Explanation

This risk was not identified. Item 1 clearly discloses the franchisor's predecessor, The Inspection Boys Franchise, Inc., from which assets were purchased in 2020. The FDD appears to provide the necessary information regarding this predecessor, and there are no disclosed bankruptcies in Item 4. The significant litigation history disclosed in Item 3 pertains to a principal of the parent company, not the predecessor entity itself.

Potential Mitigations

• An attorney can help you carefully review predecessor information in Items 1, 3, and 4 of any FDD.
• It can be useful to have a business advisor help you research a predecessor's track record independently through public records or news archives.
• When possible, asking long-term franchisees about their experience under any predecessors can provide valuable insight.