Explanation

High franchisee turnover was not identified in the FDD. Item 20 data for the past three years shows a low number of terminations, non-renewals, or other cessations relative to the system's size. While this is positive, it is still crucial for you to understand why turnover happens in franchise systems, as it can be a primary indicator of systemic problems like unprofitability or poor franchisor support.

Potential Mitigations

• Speaking with several former franchisees listed in Exhibit H is a crucial due diligence step to verify the reasons for their departure.
• Your business advisor can help you analyze the Item 20 data over the three-year period to confirm trends and system stability.
• During your validation calls with current franchisees, you should ask about their satisfaction and future intentions with the brand.

Explanation

This risk was not identified, as WaveMAX has been franchising since 2016 and has numerous operational units, so it is not a new or unproven system. When evaluating any opportunity, it is important to consider the franchisor's history and track record. A system with limited history presents a higher risk due to potentially unrefined support systems and an unproven long-term market position, which can affect your investment's stability.

Potential Mitigations

• Engaging a business advisor to research the franchisor’s reputation and track record within the industry is a prudent step.
• A thorough review of the system's growth and franchisee turnover in Item 20 with your accountant can provide insight into stability.
• Legal counsel can help you understand the full history of the business as disclosed in Items 1, 3, and 4.

Explanation

The franchised business is the operation of a laundromat, which is a long-established and traditional service industry, not a fad. When considering any franchise, you should still assess the long-term market demand for its specific products or services. A business model tied to a fleeting trend can be risky, as your contractual obligations to the franchisor will likely outlast the market's interest, potentially impacting the viability of your investment.

Potential Mitigations

• A business advisor can help you conduct independent research on the long-term outlook for the self-service laundry industry in your specific market.
• It is wise to assess the company's plans for innovation and adaptation to changing consumer needs, which may be discussed in Item 11.
• Your financial advisor can help you evaluate the business model's resilience to economic shifts and competition.

Explanation

The franchisor's management team, as described in Item 2, appears to have relevant experience in both the laundromat industry and in franchising. The CEO and COO have operated a similar business since 2012 and have led the franchise system since 2016. It is generally important to vet management's background, as inexperience can lead to poor strategic decisions and inadequate support for franchisees, increasing your operational and financial risk.

Potential Mitigations

• Speaking with existing franchisees about their perception of the management team's competence and support is a key due diligence step.
• A business advisor can help you research the professional backgrounds of the key executives listed in Item 2.
• During discovery day, you should ask management direct questions about their long-term vision and strategy for the system.

Explanation

The FDD does not indicate that the franchisor is owned by a private equity firm. This type of ownership can sometimes introduce risks, such as a focus on short-term returns over the long-term health of the brand, which could potentially impact franchisee support levels and fee structures. It is always wise to understand the ownership structure of a franchisor to assess the motivations behind key corporate decisions.

Potential Mitigations

• Your attorney should always confirm the ownership structure disclosed in Item 1 of the FDD.
• Inquiring about the franchisor's long-term goals and exit strategy during validation calls can provide valuable insight.
• A business advisor can help you understand the potential implications of different ownership structures on a franchise system.

Explanation

This risk was not identified, as the FDD states the franchisor has no parent company. In some franchise systems, a thinly capitalized subsidiary may be the franchisor, while a wealthier parent company is not disclosed or its financials are not provided. This can obscure the true financial health and backing of the franchise system. Ensuring full transparency of the entire corporate structure is an important part of due diligence.

Potential Mitigations

• Your attorney can verify the franchisor's corporate structure and confirm the absence of a controlling parent entity.
• An accountant's review of the financial statements in Item 21 can help assess if the franchisor entity appears to be self-sufficient.
• During due diligence, asking about the relationship with any affiliated companies disclosed in Item 1 is a good practice.

Explanation

The FDD states that the franchisor has no predecessors. This means the franchisor did not acquire the business from a previous entity. When a franchisor does have a predecessor, it is important to review their history for any red flags, such as past litigation, bankruptcy, or high franchisee turnover, as these issues could potentially carry over to the new ownership and affect your investment.

Potential Mitigations

• Your attorney should confirm the accuracy of the "no predecessor" statement through their review of the FDD.
• Independent online research of the franchisor's name and its key executives can sometimes uncover past business history.
• A business advisor can help you assess the complete history of the brand and its operators.

Explanation

The franchisor discloses no material litigation in Item 3. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems. The absence of such litigation is a positive sign, but it does not eliminate all risk. It is still important to conduct thorough due diligence and speak with current and former franchisees about their experiences with the franchisor.

Potential Mitigations

• Your attorney can conduct independent searches of court records to verify the accuracy of the "no litigation" disclosure.
• During your validation calls with franchisees, asking about any disputes or disagreements they have had with the franchisor is advisable.
• Understanding the dispute resolution processes outlined in the Franchise Agreement with your legal counsel is important in case a future conflict arises.