Closets by Design
Home Services
Founded 198785 locationsCompany Profile
Year Founded:1987
Closets by Design Franchise Cost
| Franchise Fee: | $20,000Key Metric |
| Total Investment: | $154,000 - $511,000Key Metric |
| Liquid Capital: | $50,000 |
| Royalty Fee: | 7% of gross sales |
| Marketing Fee: | 2% of gross sales |
Quick ROI Calculator
Based on Closets by Design's actual financial data
Outlet Counts by Year
Historical outlet data extracted from FDD documents
Total US Locations:85
Scale relative to 1,000 locations
Franchised Units:79
Corporate Units:6
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AI-Powered Due Diligence Analysis
Our advanced AI analyzes Franchise Disclosure Documents (FDDs) to identify potential risks and opportunities across 10 critical categories.
12
High Risk
Critical items
30% of total
22
Medium Risk
Monitor closely
55% of total
6
Low Risk
Manageable items
15% of total
40
Total Items
Factors analyzed
10 categories
5.75
Overall Score
Low RiskHigh Risk
010
Franchisor Stability Risks
5 risks identified
1
3
1
Limited Franchisee Transfer History
Medium
Explanation:
- Item 20, Table 2 shows a very limited number of franchise transfers (only two in the past three years). This could indicate a lack of a robust resale market for existing franchises, making it difficult for franchisees to exit the system if needed.
- A small number of transfers can also suggest potential challenges in franchise profitability or desirability, which could deter potential buyers.
Potential Mitigations:
- Thoroughly investigate the reasons behind the low transfer rate. Speak with existing and former franchisees to understand their experiences and reasons for staying or leaving.
- Research the overall resale market for similar businesses in the home services industry to assess the potential for future resales.
- Consult with a franchise attorney or business broker experienced in franchise resales to evaluate the potential for selling the franchise in the future.
FDD Citations:
- Item 20, Table 2: "Transfers of Outlets from Franchisees to New Owners (Other than the Franchisor) for Years 2022 to 2024"
Limited Growth in Franchise Outlets
Medium
Explanation:
- While there was a period of growth in 2023 (+10 units), the overall growth of franchised units is relatively modest (from 65 to 79 in three years - Item 20, Table 1). Slow growth can indicate challenges in attracting new franchisees, which could be due to market saturation, competition, or concerns about the franchise system's profitability.
- Limited growth can also impact the franchisor's ability to invest in system-wide improvements and support.
Potential Mitigations:
- Analyze the reasons for the growth pattern. Investigate market conditions, competitor activity, and franchisee satisfaction.
- Assess the franchisor's plans for future expansion and marketing efforts to attract new franchisees.
- Consider the potential impact of limited growth on brand recognition and system-wide support.
FDD Citations:
- Item 20, Table 1: "System-wide Outlet Summary for Years 2022 to 2024"
Potential for Limited Communication with Former Franchisees
Medium
Explanation:
- Item 20 mentions that some former franchisees may have signed agreements restricting their ability to speak openly about their experiences. While the FDD states no confidentiality clauses have been signed in the last three years, the mere mention of this possibility raises a concern about the transparency and availability of information from past franchisees.
Potential Mitigations:
- Speak to as many current and former franchisees as possible, focusing on those who left the system more than three years ago to understand if any restrictions apply.
- Consult with a franchise attorney to understand the implications of any potential confidentiality agreements and how to obtain relevant information despite them.
- Look for online forums or other sources of information where former franchisees may share their experiences anonymously.
FDD Citations:
- Item 20: "In some instances, current and former franchisees sign provisions restricting their ability to speak openly about their experience with Closets by Design."
Lack of Independent Franchisee Association
Low
Explanation:
- Item 20 indicates that there are no independent franchisee associations. While not inherently a risk, the absence of such an association can limit franchisees' collective bargaining power and ability to address concerns with the franchisor.
Potential Mitigations:
- Discuss with existing franchisees their views on forming an association in the future.
- Recognize that communication and negotiation with the franchisor may need to be conducted individually or in smaller groups.
FDD Citations:
- Item 20: "We have not created, sponsored or endorsed any trademark-specific franchisee organizations… There are no independent franchisee organizations that have asked to be included in this disclosure document."
Potential Financial Instability (Requires Further Investigation)
High
Explanation:
- While the provided FDD excerpt does not include the financial statements (Item 21), this section is crucial for assessing the franchisor's financial health. Without reviewing these statements, it's impossible to determine the franchisor's financial stability, profitability, and ability to support its franchisees.
- Potential risks could include declining revenues, high debt levels, or insufficient working capital, which could jeopardize the franchisor's long-term viability and its ability to fulfill its obligations to franchisees.
Potential Mitigations:
- Carefully review the franchisor's financial statements in Item 21, including the balance sheet, income statement, and cash flow statement. Look for trends and indicators of financial health.
- Consult with a financial advisor experienced in analyzing franchise financials to assess the franchisor's financial stability and potential risks.
- Compare the franchisor's financials to industry benchmarks to gauge its performance relative to competitors.
FDD Citations:
- Item 21: "FINANCIAL STATEMENTS" (Full review required)
Disclosure & Representation Risks
3 risks identified
1
2
Limited Territorial Protection
High
Explanation:
- While the franchisor states they won't operate a company-owned business in the territory, they retain broad rights to solicit leads, potentially including online and through other channels, and can service those leads themselves or through third parties if the franchisee refuses or is unable to service them. This significantly undermines the value of the exclusive territory.
- Section 3.03.B allows the franchisor to refer leads generated by the Fund to the franchisee, but the franchisee must pay up to 120% of the system average cost per lead. This could be expensive and reduce profitability.
- The franchisor's ability to compete directly or indirectly with the franchisee within the territory creates a direct conflict of interest.
Potential Mitigations:
- Negotiate for clearer definitions and limitations on the franchisor's lead generation activities within the territory, especially regarding online and national advertising leads.
- Seek clarification on the criteria for refusing or being unable to service a lead and the process for dispute resolution.
- Analyze the historical cost per lead from the Fund and assess its potential impact on profitability.
FDD Citations:
- Item 3.02: "Notwithstanding the foregoing, however, if Franchisee refuses or is unable to provide products and services...Franchisor or any of its Affiliates reserve the right to provide these products and services in the Territory directly or through subcontractors."
- Item 3.03: Details of lead generation and referral process.
- Item 3.03.B: Lead referral fees from the Fund.
Mandatory National Fund Contributions with Limited Transparency
Medium
Explanation:
- Franchisees are required to contribute 5% of Gross Sales to a national advertising fund. While the FDD mentions a National Advertising Committee, it lacks details on its composition and decision-making process, raising concerns about how these funds are spent and whether they benefit franchisees proportionally.
- The FDD doesn't clearly define "Gross Sales," potentially leading to disputes over the calculation of contributions.
Potential Mitigations:
- Request detailed information on the National Advertising Committee's composition, meeting frequency, spending decisions, and performance metrics.
- Seek a clear definition of "Gross Sales" and examples of how it's calculated in various scenarios.
- Compare the required contribution rate with industry benchmarks and other similar franchises.
FDD Citations:
- Item 10.04: Description of the National Promotion and Protection Fund and contribution requirements.
Potential for Encroachment from Other Franchisees
Medium
Explanation:
- The FDD doesn't explicitly prohibit the franchisor from granting franchises for adjacent territories that could potentially encroach on the existing franchisee's customer base. This could lead to increased competition and reduced market share.
Potential Mitigations:
- Request clarification on the franchisor's policy regarding the granting of franchises in adjacent territories and any protective measures in place to prevent encroachment.
- Negotiate for a larger territory or a right of first refusal for adjacent territories.
FDD Citations:
- Item 3.01: Description of the territorial grant.
Financial & Fee Risks
3 risks identified
2
1
Wide Range in Initial Investment
High
Explanation:
- The estimated initial investment ranges from $154,000 to $511,000, a significant difference. This wide range makes it difficult to accurately predict startup costs and secure appropriate financing.
- The high end of the range could strain the financial resources of some potential franchisees.
- The variability suggests potential hidden costs or a lack of clarity in the franchisor's cost estimations.
Potential Mitigations:
- Carefully review Item 7 and all related disclosures to understand the reasons for the wide range.
- Consult with a financial advisor to determine the true cost of opening and operating the franchise in your specific market.
- Request a detailed breakdown of the highest and lowest investment scenarios from the franchisor.
- Secure financing pre-approval for the high end of the range to avoid funding shortfalls.
FDD Citations:
- Item 7: "TOTALS $154,000 to $511,000"
Variable Market Development Fee
Medium
Explanation:
- The Market Development Fee varies based on territory size, calculated as the greater of $18,000 or $1,000 per 10,000 households. This makes it difficult to predict the exact cost and compare territories effectively.
- The fee structure may incentivize the franchisor to award larger, less densely populated territories, potentially impacting market penetration and profitability.
Potential Mitigations:
- Request a clear explanation of the methodology used to determine territory size and the corresponding Market Development Fee.
- Analyze the demographics and market potential of different territories to ensure the fee aligns with the business opportunity.
- Negotiate the territory size and fee if the proposed territory seems disproportionately large or expensive.
FDD Citations:
- Item 7: "Market Development Fee: Greater of (i) $18,000 or (ii) $1,000 for each increment or portion of 10,000 households in the Territory."
Significant Variation in FF&E Costs
High
Explanation:
- The Furniture, Fixtures, and Equipment (FF&E) costs range from $37,000 to $254,000. This substantial variation creates uncertainty in budgeting and could lead to cost overruns.
- The high-end estimate is considerably higher than other initial investment components, suggesting potential for significant expenditure.
Potential Mitigations:
- Obtain detailed specifications for FF&E included in both the high and low estimates.
- Compare the franchisor's provided quotes with independent vendor quotes to ensure competitive pricing.
- Explore financing options for FF&E to manage upfront costs.
- Negotiate with the franchisor to clarify the reasons for the wide range and potentially reduce costs.
FDD Citations:
- Item 7: "Furniture, Fixtures and Equipment (including computer): $37,000 to $254,000"
Legal & Contract Risks
3 risks identified
2
1
Superseding State Laws and Court Decisions
Medium
Explanation:
- Washington's RCW 19.100.180 and potential court decisions can override the Franchise Agreement, especially regarding termination and renewal. This creates uncertainty and potential conflict between the contract and state law.
Potential Mitigations:
- Carefully review RCW 19.100.180 and relevant case law with a franchise attorney specializing in Washington law to understand potential impacts on the franchise agreement.
- Seek clarification from the franchisor on how they address potential conflicts between the agreement and state law.
FDD Citations:
- Item 2: "RCW 19.100.180 may supersede provisions in the franchise agreement...including in the areas of termination and renewal..."
Mandatory Washington Jurisdiction for Disputes
Low
Explanation:
- Arbitration, mediation, or litigation related to franchises purchased in Washington must occur in Washington state unless mutually agreed otherwise. This can be inconvenient and costly for franchisees outside of Washington.
Potential Mitigations:
- If located outside Washington, factor in potential travel and legal costs associated with dispute resolution in Washington.
- Negotiate with the franchisor for alternative dispute resolution locations if possible.
FDD Citations:
- Item 3: "In any arbitration or mediation involving a franchise purchased in Washington, the arbitration or mediation site will be either in the state of Washington..."
Voiding of Certain Releases and Waivers
Medium
Explanation:
- Releases or waivers of rights under the Washington Franchise Investment Protection Act are generally void, except in specific circumstances involving negotiated settlements with independent counsel. This protects franchisees from unknowingly waiving important legal rights.
Potential Mitigations:
- Avoid signing any releases or waivers without consulting an independent franchise attorney.
- Ensure any negotiated settlement is conducted with legal representation and a clear understanding of the implications.
FDD Citations:
- Item 4: "A release or waiver of rights...purporting to bind the franchisee to waive compliance with any provision under the Washington Franchise Investment Protection Act...is void..."
Territory & Competition Risks
3 risks identified
1
2
Market Saturation and Competition from Existing Franchisees
Medium
Explanation:
- The FDD mentions a buy-out option if the franchisor or an affiliate operates the same business in the franchisee's territory. This suggests potential for encroachment or market saturation, especially as the franchise system grows.
- Competition from other Closets by Design franchisees within the defined territory or nearby territories could impact market share and profitability.
- The 2-year, 35-mile non-compete after termination could limit future business opportunities if the franchisee chooses to leave the system.
Potential Mitigations:
- Carefully review Item 12 and Section 3.06 of the Franchise Agreement to fully understand the buy-out option terms and conditions. Determine if it adequately compensates for potential lost revenue due to corporate encroachment.
- Thoroughly research the existing Closets by Design market presence in and around the desired territory. Analyze population density, demographics, and competitor landscape to assess market saturation and potential for growth.
- Discuss the territory boundaries and potential for future franchise sales within those boundaries with the franchisor. Seek clarification on their strategy for managing competition between franchisees.
FDD Citations:
- Item 12, Section 3.06: Details of the buy-out option.
- Item 13.02, Exhibit 4: Non-compete clause details.
Post-Termination Non-Compete Agreement
High
Explanation:
- The 2-year, 35-mile non-compete clause after termination is restrictive and could significantly limit future business opportunities in the same industry.
- The tolling provision for non-compliance extends the non-compete period indefinitely, creating a substantial risk for franchisees.
- The requirement to transfer customer lists and data upon leaving the system further restricts future business prospects.
Potential Mitigations:
- Consult with a legal professional specializing in franchise law to fully understand the implications of the non-compete agreement and explore options for negotiation.
- Carefully consider the long-term career implications of the non-compete clause before signing the franchise agreement.
- Develop a clear understanding of what constitutes "full compliance" with the non-compete to avoid unintentional tolling of the restriction period.
FDD Citations:
- Item 13.02, Exhibit 4: Specific details of the non-compete clause, including the tolling provision and data transfer requirement.
Limited Territory Protection
Medium
Explanation:
- While the FDD mentions a territory, the specific details regarding its exclusivity and protection are not provided in this excerpt. The franchisor's ability to establish company-owned or other franchised locations within or near the territory could create competition.
Potential Mitigations:
- Carefully review the Franchise Agreement (Item 12 and Section 3.06) for the precise definition of the territory, including its boundaries and any exclusivity provisions.
- Inquire with the franchisor about their development plans for company-owned or franchised locations in and around the desired territory.
- Negotiate for stronger territory protection language in the Franchise Agreement if the initial terms are insufficient.
FDD Citations:
- Item 12, Section 3.06: Referenced for territory details, although not explicitly provided in the excerpt.
- Item 13.02, Exhibit 4: References the territory in the context of the non-compete.
Regulatory & Compliance Risks
3 risks identified
1
2
Tax Reporting and Withholding Compliance
Medium
Explanation:
- The FDD mentions Form W-9 requirements, indicating potential complexities in tax reporting and withholding for franchisees. Misunderstanding or improper handling of these requirements could lead to penalties and legal issues.
- The reference to "disregarded entity" and "joint account" adds complexity and requires careful attention to ensure proper tax classification and reporting.
Potential Mitigations:
- Consult with a tax advisor specializing in franchise businesses to understand the specific tax obligations and ensure compliance with federal, state, and local regulations.
- Establish clear internal processes for tax reporting and withholding, including proper documentation and record-keeping.
- Ensure all responsible personnel are trained on the correct procedures for handling Form W-9 and other tax-related documents.
FDD Citations:
- FDD Excerpt: "To establish to the withholding agent that you are a U.S. person, or resident alien, sign Form W-9. You may be requested to sign by the withholding agent even if item 1, 4, or 5 below indicates otherwise."
- FDD Excerpt: "For a joint account, only the person whose TIN is shown in Part I should sign (when required). In the case of a disregarded entity, the person identified on line 1 must sign."
Restrictions on Sales Territories and Customer Base
High
Explanation:
- The FDD outlines restrictions on sales territories and customer types, limiting the franchisee's potential market reach and revenue generation opportunities. Requiring written consent for business outside the territory and limiting wholesale sales can hinder growth.
- The requirement for approval for contracts with national/regional chains or commercial accounts, coupled with the 20% revenue cap, further restricts potential high-value clients.
Potential Mitigations:
- Carefully review the designated territory and understand its demographics and market potential. Negotiate for a favorable territory during the franchise agreement process.
- Clearly understand the process for obtaining written consent for business outside the territory and for engaging with large retail or commercial clients.
- Develop a diversified sales strategy that focuses on maximizing within-territory potential while exploring approved avenues for expansion.
FDD Citations:
- FDD Excerpt: "You are not limited as to the customers to whom you may sell our Organizers (see Item 8 of this disclosure document), except for the following limitations: You may not conduct any Closets By Design business outside your Territory without our written consent (see Items 6 and 12)."
- FDD Excerpt: "We must approve in writing any contract or other engagement of yours to provide closets or organizers to or through (i) a national or regional retail store chain or (ii) commercial account, and none of these engagements may account for more than 20% of your Gross Revenues in any 12- month period."
Mandatory System Changes and Cobranding
Medium
Explanation:
- The franchisor's right to implement system changes, including co-branding initiatives, can impose unexpected costs and operational disruptions on the franchisee. Modifications to premises, furniture, fixtures, and signage can be substantial expenses.
- While there are stated financial limits on these changes, the franchisor retains significant control over implementing new programs, potentially impacting the franchisee's established business model.
Potential Mitigations:
- Thoroughly review the FDD provisions related to system changes and co-branding, paying close attention to the financial limitations and the franchisor's decision-making authority.
- Maintain a reserve fund to cover potential expenses associated with mandatory system upgrades and modifications.
- Engage in open communication with the franchisor regarding upcoming changes and seek clarification on their potential impact on the franchisee's business.
FDD Citations:
- FDD Excerpt: "CBDF has the right to add or delete authorized products and services that you are required to offer or sell."
- FDD Excerpt: "If CBDF gives written notice to you that it is instituting a cobranding program, you must promptly implement that program in your Closets By Design Business at the earliest commercially reasonable time and to execute any and all instruments required to do so."
Franchisor Support Risks
7 risks identified
2
3
2
Total Assignment of Intellectual Property
High
Explanation:
- The FDD requires franchisees to permanently and irrevocably assign all intellectual property developed in connection with the business to the franchisor. This includes any improvements to products, services, marketing materials, and even management techniques. This broad assignment could stifle innovation and prevent franchisees from benefiting from their own creative efforts.
Potential Mitigations:
- Carefully review the assignment clause with an attorney specializing in franchise law to fully understand its implications.
- Negotiate with the franchisor to narrow the scope of the assignment, potentially excluding improvements developed independently of the franchisor's resources or those not directly related to the core franchised business.
FDD Citations:
- Provided text excerpt: "You must permanently and irrevocably assign to CBDF... all other intellectual property developed by you or on behalf of your franchised Business."
Limited Recourse for Proprietary Information Infringement
Medium
Explanation:
- While the FDD outlines obligations for protecting proprietary information, the franchisor's response to infringement is discretionary. The statement "CBDF is not obligated to take any action but will respond to this information as it thinks appropriate" creates uncertainty about the level of support franchisees can expect if their exclusive use of proprietary information is compromised.
Potential Mitigations:
- Request clarification from the franchisor regarding their typical response to infringement incidents and what constitutes "appropriate" action.
- Consult with an attorney to understand your legal options for protecting proprietary information independently, if necessary.
FDD Citations:
- Provided text excerpt: "CBDF is not obligated to take any action but will respond to this information as it thinks appropriate."
- Item 11: Description of Confidential Manuals.
- Item 13: Obligations for protecting Proprietary Marks (applied similarly to copyrights).
Mandatory Co-branding Implementation
Medium
Explanation:
- The franchisor reserves the right to implement co-branding programs, requiring franchisees to adopt new brands, potentially altering their established brand identity and requiring modifications to premises and signage. This mandatory adoption could lead to unexpected costs and disrupt existing marketing efforts.
Potential Mitigations:
- Inquire about the franchisor's history of co-branding initiatives and their potential impact on existing franchisees.
- Seek clarification on the financial responsibility for modifications required by co-branding programs.
FDD Citations:
- Provided text excerpt: "If CBDF gives written notice to you that it is instituting a cobranding program, you must promptly implement that program..."
Potential for Increased Obligations and Expenses
Medium
Explanation:
- The franchisor can add or delete products and services, potentially requiring additional investment from franchisees. While the FDD mentions limits to these increases, the language "materially and unreasonably increase your obligations" is subjective and could be interpreted differently by the franchisor.
Potential Mitigations:
- Request specific examples of past product/service additions and the associated costs for existing franchisees.
- Negotiate clearer definitions of "material" and "unreasonable" increases in obligations within the Franchise Agreement.
FDD Citations:
- Provided text excerpt: "The changes will not materially and unreasonably increase your obligations under the Franchise Agreement."
Potential Price Controls
Low
Explanation:
- The FDD states the franchisor may prescribe maximum retail prices. This could limit franchisees' ability to adjust pricing based on local market conditions or competitive pressures, potentially impacting profitability.
Potential Mitigations:
- Request clarification on the franchisor's current pricing policies and how often they are adjusted.
- Analyze the competitive landscape in your target territory to assess the potential impact of price controls.
FDD Citations:
- Provided text excerpt: "CBDF may prescribe the maximum retail prices which you may charge customers..."
- Item 7: Franchise Agreement, Section 7.09 (regarding pricing).
Restrictions on Customer Base and Sales Activities
Low
Explanation:
- Franchisees are restricted from conducting business outside their designated territory and engaging in wholesale sales without prior approval. These limitations could hinder growth opportunities, especially for franchisees with ambitions to expand their customer base or explore different sales channels.
Potential Mitigations:
- Carefully review the territorial restrictions and understand the process for obtaining consent to operate outside the assigned territory.
- Inquire about the franchisor's criteria for approving wholesale sales and explore potential opportunities within those guidelines.
FDD Citations:
- Provided text excerpt: "You may not conduct any Closets By Design business outside your Territory without our written consent."
- Item 6: Territory definition.
- Item 8: Description of Organizers and customer limitations.
- Item 12: Restrictions on sales activities.
Limited Control over Vendor Relationships
High
Explanation:
- While not explicitly mentioned, the FDD's focus on proprietary systems and products suggests potential limitations on franchisees' ability to source materials or services from independent vendors. This dependence on franchisor-approved vendors could impact cost control and flexibility in responding to local market demands.
Potential Mitigations:
- Specifically inquire about vendor relationships and any restrictions on sourcing materials or services independently.
- Request information on the pricing and quality control measures for franchisor-approved vendors.
- Negotiate for flexibility in vendor selection, especially for non-core business functions.
FDD Citations:
- None provided in the given text. This is a potential risk inferred from the context of proprietary systems and products.
Exit & Transfer Risks
3 risks identified
3
Restrictive Transfer Provisions Superseded by State Law
Medium
Explanation:
- While the FDD mentions transfer fees (Item 6) and acknowledges state law supersede, the specific details of transfer restrictions and how they interact with state laws (e.g., Washington's RCW 19.100.180) are unclear. This lack of clarity creates a risk that the franchisor's interpretation of permissible transfer restrictions may be more stringent than what state law allows, potentially hindering the franchisee's ability to sell their business.
- Items 2, 4, and 16, along with Wisconsin Addendum 4, emphasize that certain waivers or releases related to state franchise laws are void. This reinforces the importance of understanding how state-specific regulations impact transfer provisions.
Potential Mitigations:
- Carefully review the Franchise Agreement for all clauses related to transfers, including fees, approval processes, and any restrictions on potential buyers. Compare these clauses with the relevant state franchise laws (e.g., RCW 19.100.180 for Washington) to identify any discrepancies.
- Consult with a franchise attorney specializing in the relevant state laws to ensure a thorough understanding of your rights and obligations regarding transfers.
- Negotiate with the franchisor to clarify any ambiguous language in the transfer provisions and ensure they align with state law. Document any agreed-upon modifications in writing.
FDD Citations:
- Item 2: "RCW 19.100.180 may supersede provisions... concerning... renewal of your franchise."
- Item 4: "A release or waiver of rights... in connection with a renewal or transfer of a franchise is likewise void..."
- Item 6: "Transfer fees are collectable only to the extent that they reflect the franchisor’s reasonable estimated or actual costs."
- Item 16: "No statement... signed... shall have the effect of (i) waiving any claims under any applicable state franchise law..."
- Wisconsin Addendum 4: Similar language to Item 16 regarding waivers.
Unclear Termination Rights and Buy-Back Provisions
Medium
Explanation:
- Item 7 states the franchisee may terminate under state law, but doesn't specify those grounds, creating uncertainty. Item 8 prohibits buy-backs without consent unless for "good cause," but the definition of "good cause" is unclear. Wisconsin Addendum 3 adds further complexity with its interaction with Article 17 of the Franchise Agreement.
- This lack of clarity could expose franchisees to unexpected termination or buy-back scenarios, potentially jeopardizing their investment.
Potential Mitigations:
- Consult with a franchise attorney to understand termination rights under both the agreement and applicable state laws.
- Request clarification from the franchisor on the definition of "good cause" for buy-backs and how it aligns with state law.
- Negotiate for more specific termination and buy-back provisions in the Franchise Agreement to reduce ambiguity.
FDD Citations:
- Item 7: "The franchisee may terminate the franchise agreement under any grounds permitted under state law."
- Item 8: "Provisions... that permit the franchisor to repurchase... without the franchisee’s consent are unlawful... unless the franchise is terminated for good cause."
- Wisconsin Addendum 3: References 90-day notice and 60-day remedy periods, superseding Article 17.
Potential for Disputes Over \
Medium
Explanation:
- Item 9 states that requiring purchases above "fair and reasonable" prices is unlawful. However, "fair and reasonable" is subjective and could lead to disputes between the franchisor and franchisee regarding required product/service pricing.
Potential Mitigations:
- Request detailed pricing information for all required products and services upfront.
- Compare pricing with market rates to assess fairness and reasonableness.
- Negotiate clear pricing terms in the Franchise Agreement or request benchmarks for future price adjustments.
FDD Citations:
- Item 9: "Any provision... that requires the franchisee to purchase or rent any product or service for more than a fair and reasonable price is unlawful..."
Operational & Brand Risks
7 risks identified
2
3
2
Limited Customer Base & Wholesale Restrictions
Medium
Explanation:
- Franchisees are restricted from conducting business outside their designated territory without consent, potentially limiting growth opportunities.
- Wholesale activities are prohibited without prior approval, restricting potential revenue streams and flexibility.
- Contracts with national/regional retail chains or commercial accounts require franchisor approval and are capped at 20% of gross revenue, limiting larger-scale business opportunities.
Potential Mitigations:
- Clearly understand territory boundaries and explore opportunities for expansion through negotiation with the franchisor.
- Discuss potential wholesale opportunities with the franchisor and present a strong business case for approval.
- Develop strong relationships with local businesses and explore alternative partnerships within the allowed revenue limits.
FDD Citations:
- Item 8: Reference to customer limitations.
- Item 12: Territory restrictions.
- Franchise Agreement, Section 3.04 C: Restrictions on national/regional retail and commercial accounts.
Mandatory Product/Service Changes & Cobranding
Medium
Explanation:
- The franchisor can mandate new products/services and co-branding initiatives, requiring franchisees to adapt and potentially incur significant costs.
- While there are financial limits on required investments, changes could still disrupt operations and require additional training or marketing efforts.
- Cobranding could dilute the established Closets by Design brand identity and potentially confuse customers.
Potential Mitigations:
- Carefully review the FDD provisions regarding required investments and negotiate favorable terms.
- Maintain open communication with the franchisor about upcoming changes and participate in training programs.
- Develop a flexible business model that can adapt to new product/service offerings and marketing strategies.
FDD Citations:
- FDD Page 37: Details on franchisor's right to add/delete products/services and implement co-branding.
Mandatory Price Controls
Medium
Explanation:
- The franchisor has the right to dictate maximum retail prices, limiting the franchisee's ability to adjust pricing based on local market conditions or competitive pressures.
- This could impact profitability, especially in areas with higher operating costs or strong competition.
Potential Mitigations:
- Thoroughly analyze the franchisor's pricing strategy and its potential impact on profitability in the target market.
- Negotiate with the franchisor for flexibility in pricing or explore opportunities for value-added services to differentiate and justify higher prices.
- Focus on cost control and operational efficiency to maximize profit margins within the established pricing structure.
FDD Citations:
- Franchise Agreement, Section 7.09: Franchisor's right to set maximum retail prices.
- FDD Page 37: Reference to price controls.
Intellectual Property Assignment
High
Explanation:
- Franchisees are required to permanently and irrevocably assign all developed intellectual property to the franchisor, including improvements to products, services, and marketing materials.
- This restricts the franchisee's ability to benefit from their own innovations and potentially limits future business opportunities outside the franchise.
Potential Mitigations:
- Carefully review the IP assignment clause and seek legal advice to fully understand its implications.
- Negotiate with the franchisor to retain some rights to developed IP or explore alternative arrangements that recognize the franchisee's contributions.
- Focus on implementing and adapting the existing franchise system rather than developing significant new IP.
FDD Citations:
- FDD Page 37: Details on mandatory IP assignment.
Dependence on Franchisor's Trade Secrets
Low
Explanation:
- The franchise relies heavily on the franchisor's confidential manuals and trade secrets, creating dependence and limiting independent operation.
- Unauthorized disclosure of these materials can lead to legal action.
Potential Mitigations:
- Thoroughly review the confidential manuals and understand the obligations regarding their use and protection.
- Implement strict procedures to safeguard confidential information and train employees on proper handling.
- Consult with legal counsel to ensure compliance with confidentiality agreements.
FDD Citations:
- FDD Page 37: Description of trade secrets and confidentiality obligations.
- Item 11: Reference to Confidential Manuals.
Limited Franchisor Obligation for IP Infringement by Others
Low
Explanation:
- While the franchisor indemnifies for losses related to authorized use of their IP, they are not obligated to take action against unauthorized use by third parties, leaving the franchisee potentially vulnerable.
Potential Mitigations:
- Understand the limitations of the franchisor's indemnification and discuss potential scenarios of third-party IP infringement.
- Consult with legal counsel to explore options for protecting the franchisee's interests in case of unauthorized IP use by others.
- Regularly monitor the market for potential infringements and promptly report any instances to the franchisor.
FDD Citations:
- FDD Page 37: Franchisor's limited obligation regarding unauthorized IP use.
- Item 13: Reference to Proprietary Marks and related obligations.
Financial Investment Risk for System Modifications
High
Explanation:
- While the franchisor sets financial limits on required investments for system modifications, the ongoing potential for required upgrades and changes represents a continuous financial risk.
- The cumulative effect of these expenses over time could strain the franchisee's finances, especially if revenue growth does not keep pace.
Potential Mitigations:
- Develop a detailed financial projection that accounts for potential system modification costs over the term of the franchise agreement.
- Establish a reserve fund specifically for these expenses to mitigate the impact of unexpected upgrades.
- Negotiate with the franchisor for clear and predictable schedules for system modifications to allow for better financial planning.
FDD Citations:
- FDD Page 37: Details on financial limits for system modifications and the franchisor's right to implement changes.
Performance & ROI Risks
3 risks identified
2
1
Wide Range of Franchisee Performance
High
Explanation:
- Item 19 reveals a substantial disparity in annual sales between top and bottom performing franchises. The highest performing franchise achieved $36,193,416 in annual sales, while the lowest earned only $1,504,132. This vast difference indicates significant variability in franchisee success and raises concerns about the predictability of potential earnings.
- The data shows that only 22 out of 60 mature franchises (36.7%) met or exceeded the average annual sales. This suggests that a significant portion of franchisees struggle to achieve average performance levels.
- Similar disparities exist within the quartile breakdowns. For example, in the bottom quartile of Mature Franchised Businesses, none achieved the average annual sales, and only 3 (20%) met or exceeded the average sale.
Potential Mitigations:
- Thoroughly investigate the factors contributing to the wide performance gap. Interview successful and struggling franchisees to understand their strategies, challenges, and market conditions.
- Carefully assess your own skills, experience, and resources to determine if you possess the qualities necessary to achieve high-end performance. Consider your local market demographics, competition, and potential customer base.
- Develop a realistic business plan that accounts for potential challenges and incorporates strategies to mitigate risks. Seek guidance from experienced business advisors and explore local market research to refine your plan.
FDD Citations:
- Item 19, Table A and B: Data on Average and Median Annual Sales, and quartile breakdowns.
Lack of Affiliate Performance Data
High
Explanation:
- The FDD explicitly states that financial performance information for the six non-franchised Closets by Design businesses owned by the affiliate CBDI is not included. This omission prevents potential franchisees from comparing franchised and non-franchised business performance, which could offer valuable insights into the franchisor's operating model and potential profitability.
Potential Mitigations:
- Request clarification from the franchisor regarding the rationale for excluding affiliate performance data. Inquire about the possibility of obtaining this information through alternative channels.
- Research industry benchmarks and competitor performance data to gain a broader understanding of the market and potential profitability.
FDD Citations:
- Item 19, Opening Paragraph: "Financial performance information regarding the 6 non-franchised Closets By Design Businesses owned and operated by our affiliate CBDI is not included in this Item 19 disclosure."
Reliance on Franchisee-Provided Data
Medium
Explanation:
- The FDD acknowledges that the financial performance data is provided by franchisees and has not been audited or independently verified by the franchisor. This reliance on unaudited data introduces the risk of inaccuracies or inconsistencies, potentially affecting the reliability of the presented information.
Potential Mitigations:
- Engage a qualified financial professional to review the available data and assess its credibility. Consider contacting existing franchisees to discuss their financial performance and compare their experiences with the information presented in the FDD.
- Recognize that the presented data represents a snapshot of past performance and may not accurately reflect future results. Conduct independent market research and develop realistic financial projections based on your specific circumstances.
FDD Citations:
- Item 19: "The information was furnished to CBDF by its franchisees, who did not audit it. It is important to note that CBDF itself has not audited or otherwise independently verified the information furnished to CBDF by its franchisees."
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FDD Year: 2025
Uploaded: 8/8/2025
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