Explanation

This specific risk was not identified in the FDD Package. The franchisee turnover rates disclosed in Item 20 do not appear to be unusually high. However, high turnover can be a major red flag in other systems, often indicating franchisee dissatisfaction, lack of profitability, or poor franchisor support. Monitoring these statistics is a key part of due diligence.

Potential Mitigations

• An accountant can help you calculate and analyze the turnover percentages from Item 20 data over the last three years.
• Contacting former franchisees listed in the FDD is a critical step your business advisor can help you with to understand why they left the system.
• Your attorney can help you frame questions for the franchisor regarding any trends in outlet closures or transfers.

Explanation

This specific risk was not identified in the FDD Package. Item 20 data shows the system size has been stable, not undergoing rapid expansion. In other franchises, excessively fast growth can strain a franchisor's ability to provide adequate training, site selection assistance, and ongoing support to all its new franchisees, potentially harming the entire system's quality and reputation.

Potential Mitigations

• A business advisor can help you evaluate if a franchisor's support staff and infrastructure are growing in proportion to its unit count.
• Speaking with franchisees who opened at different times can provide insight into whether support levels have changed during growth periods.
• Your accountant should review a franchisor's financial statements to determine if they have the capital to sustain rapid growth.

Explanation

This specific risk was not identified in the FDD Package. Touching Hearts, Inc. has been franchising since 2007 and operates in a well-established industry. For other, newer franchise systems, a lack of operating history can present a higher risk, as their business model, support systems, and brand recognition may be unproven in the marketplace.

Potential Mitigations

• For a new system, it is critical that your attorney and accountant conduct deeper due diligence on the prior experience of the management team.
• A business advisor can help you assess the viability of an unproven concept and the strength of its initial marketing and support plans.
• It is wise to talk to the very first franchisees of a new system to learn about their experiences and challenges.

Explanation

This specific risk was not identified in the FDD Package. The in-home senior care industry is based on long-term demographic trends, not a short-term fad. In other industries, investing in a business model based on a fleeting trend can be risky, as consumer interest may disappear, leaving you with a long-term contract for a business with no customers.

Potential Mitigations

• A business advisor can help you research and assess whether a business concept is supported by sustainable, long-term market demand.
• Consider if the business has the ability to adapt its products or services if the initial trend fades.
• Your financial advisor can help you evaluate the business's resilience to economic shifts and changes in consumer taste.

Explanation

This specific risk was not identified in the FDD Package. The management team detailed in Item 2 appears to have significant and long-term experience with the company and in the industry. For other franchises, inexperienced management can be a major risk, as they may lack the skills to provide effective support, manage growth, or navigate industry challenges.

Potential Mitigations

• A business advisor can help you thoroughly vet the backgrounds of a franchisor's key executives, focusing on both industry and franchising experience.
• Speaking directly with current franchisees is one of the best ways to gauge the competence and responsiveness of the management team.
• Your attorney can help you question the franchisor about their strategic planning and the depth of their support departments.

Explanation

This specific risk was not identified in the FDD Package. Item 1 does not indicate that the franchisor is owned by a private equity firm. When this is the case, there can be a risk that the ownership's focus on short-term returns may lead to decisions, such as cutting support or increasing fees, that are not aligned with the long-term health of franchisees.

Potential Mitigations

• If a franchisor is PE-owned, a business advisor can help you research the firm's reputation and its track record with other franchise brands.
• It is important to ask franchisees about any changes in the system's culture, support, or cost structure since a PE acquisition.
• Your attorney should analyze the assignment clauses in the Franchise Agreement to understand what happens if the brand is sold again.

Explanation

This specific risk was not identified in the FDD Package. The FDD does not mention a parent company. In cases where a franchisor is a subsidiary of a larger entity, a prospective franchisee should be concerned if the parent's financial information is not provided, as it can obscure the true financial backing and stability of the system.

Potential Mitigations

• Your attorney should verify the franchisor's corporate structure to ensure there are no undisclosed parent companies exercising control.
• If a parent company exists and guarantees the franchisor's performance, an accountant should review its financial statements carefully.
• It is important to understand the full corporate structure to assess where the ultimate responsibility for franchisor obligations lies.

Explanation

This specific risk was not identified in the FDD Package. Item 1 does not disclose any predecessor entities. When a franchisor has predecessors, it is important to review their history for issues like litigation, bankruptcy, or high franchisee turnover, as these could indicate historical problems with the system that may persist under the new ownership.

Potential Mitigations

• Your attorney should carefully review Item 1, 3, and 4 for any disclosed information about predecessors.
• If a system was acquired, consider asking long-term franchisees about their experience under the prior ownership.
• A business advisor can help you research the history and reputation of any predecessor company.

Explanation

This specific risk was not identified in the FDD Package. Item 3 states that no litigation is required to be disclosed, which is a positive sign. A pattern of lawsuits in other FDDs, especially franchisee claims of fraud or misrepresentation, can be a serious warning about systemic problems with a franchisor's business practices, support, or disclosure integrity.

Potential Mitigations

• Your attorney should always carefully analyze the nature, frequency, and outcomes of any litigation disclosed in Item 3.
• Consider that a high volume of lawsuits initiated by the franchisor against its franchisees can also be a red flag for an overly aggressive system.
• Discussing any disclosed litigation with current and former franchisees can provide valuable context beyond the FDD's summary.