Explanation

This risk was not identified in the FDD package. The data in Item 20 shows the franchise system is brand new, with only one franchised outlet opened in the most recent year and no terminations, non-renewals, or other cessations. High turnover is a significant red flag in established systems, often indicating franchisee dissatisfaction or lack of profitability. As this system grows, monitoring future Item 20 tables for signs of high churn will be critical for assessing system health.

Potential Mitigations

• When reviewing future FDDs, have an accountant help you calculate the annual turnover rate to identify any negative trends.
• Should turnover increase, engaging a business advisor to contact former franchisees and understand their reasons for leaving is a crucial due diligence step.
• Your attorney can help you interpret the nuances of Item 20 data, such as the difference between transfers and franchisor reacquisitions.

Explanation

This risk was not identified in the FDD package. Item 20 tables show a new system with only one franchise sold, so rapid growth is not currently a factor. However, a rapid expansion without proportional investment in support staff and infrastructure can strain a franchisor's resources. This can lead to inadequate training, delayed assistance, and poor quality control for franchisees. Monitoring the pace of growth against the franchisor's resources will be important in the future.

Potential Mitigations

• If the system grows rapidly, discussing the quality of support with a wide range of franchisees would be a prudent step to take with your business advisor.
• An accountant can help you analyze future financial statements to determine if the franchisor is reinvesting in support infrastructure.
• Consulting your attorney on the franchisor's contractual support obligations can provide a baseline for what to expect.

Explanation

This risk was not identified in the FDD package. The business of real estate appraisal and valuation services is a well-established professional field with consistent demand driven by real estate transactions, legal matters, and financing. While market conditions fluctuate, the core service is not based on a short-term trend or fad. The business model's viability depends on market competition and execution rather than fleeting consumer interest.

Potential Mitigations

• A business advisor can help you research long-term demand for appraisal services in your specific local market.
• It is wise to have your accountant help you create financial models that account for fluctuations in the real estate market.
• Discussing the competitive landscape and sustainable business strategies with a professional advisor is recommended.

Explanation

This risk was not identified in the FDD package. According to Item 2, the franchisor's management team has direct, multi-year operational experience in the real estate valuation industry, both with the parent company, Velox Valuations LLC, and a prior company, Mr. Cooper/Xome. While their franchising experience is new, their deep industry-specific experience is a positive factor. In franchising, a lack of relevant industry knowledge at the management level can be a significant risk.

Potential Mitigations

• Engaging a business advisor to interview the management team about their specific plans for supporting franchisees is a wise step.
• You should confirm the management team's reputation and history within the appraisal industry through independent research.
• An attorney can help you understand the contractual commitments for training and support outlined in the FDD.

Explanation

This risk was not identified in the FDD package. Item 1 does not indicate that the franchisor or its parent company is owned by a private equity firm. When a franchisor is PE-owned, there can be a risk that decisions are focused on short-term investor returns rather than the long-term health of the franchisees and the brand. This can sometimes manifest as increased fees, reduced support, or a quick sale of the franchise system.

Potential Mitigations

• In any franchise review, it's wise to have your attorney help you research the ownership structure of the franchisor.
• Should you encounter a PE-owned franchisor, a business advisor can help investigate the firm's track record with other franchise brands.
• An accountant can assist in reviewing financials for signs of cost-cutting in franchisee support services.

Explanation

This risk was not identified in the FDD package. Item 1 states that the franchisor does not have any predecessors. A predecessor is a company from which the franchisor acquired the main assets of the business. When a predecessor exists, it is important to review their history for any issues like litigation, bankruptcy, or high franchisee turnover, as these could reflect on the health of the system you are buying into.

Potential Mitigations

• During any FDD review, it is a good practice to have your attorney confirm the predecessor history disclosed in Item 1.
• If a predecessor is identified in an FDD, a business advisor can help you research its history and reputation.
• Interviewing long-term franchisees about their experience under any prior ownership is a crucial due diligence step.

Explanation

This risk was not identified in the FDD package. Item 3 discloses that there is no litigation that requires disclosure. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems. Similarly, a high volume of lawsuits initiated by the franchisor against franchisees might suggest an overly aggressive or litigious culture. The absence of such disclosures here is a positive sign, though the system is very new.

Potential Mitigations

• It is always prudent to have your attorney conduct an independent public records search for litigation involving the franchisor or its principals.
• A discussion with a business advisor about acceptable levels of litigation in a franchise system can provide valuable context.
• Engaging with current and former franchisees can sometimes reveal disputes that did not escalate to formal litigation.