Key Items to Watch out for in the HM Services, LLC 2020 FDD
Certain states require that the following risk(s) be highlighted: Out-of-State Dispute Resolution. The franchise agreement requires you to resolve disputes with the franchisor by mediation, arbitration and/or litigation only in Texas. Out-of-state mediation, arbitration, or litigation may force you to accept a less favorable settlement for disputes. It may also cost more to mediate, arbitrate, or litigate with the franchisor in Texas than in your own state. Mandatory Minimum Payments. You must make minimum license fee payments, regardless of your sales levels. Your inability to make the payments may result in termination of your franchise and loss of your investment. Spousal Liability. Your spouse may be required to sign a document that makes your spouse liable for all financial obligations under the franchise agreement even though your spouse has no ownership interest in the franchise. This guarantee will place both you and your spouse’s marital and personal assets, perhaps including your house, at risk if your franchise fails.
Certain states may require other risks to be highlighted. Check the “State Specific Addenda” (if any) to see whether your state requires other risks to be highlighted.
Item 5: Initial Fees
Initial Franchise Fee The initial franchise fee you must pay to us is $42,500, for a Territory made up of contiguous zip codes consisting of up to approximately 75,000 owner-occupied homes. The initial franchise fee is subject to discounts, as described below. The number of owner-occupied homes is determined by the most recent census figures available and such determination may be updated from time to time by certain third-party demographic providers. The actual number of owner-occupied homes in your Territory may be more or less than 75,000. The initial franchise fee for any Territory that contains more than 75,000 owner-occupied homes at the time of purchase will be increased by an additional amount of $0.57 per owner-occupied home for every owner-occupied home above 75,000; provided that if you wish to purchase territory that will have 120,000 or more owner-occupied homes, we will require you to purchase the territory under multiple separate Franchise Agreements. We may, in our sole discretion,permit you to add unoccupied zip codes, which are immediately adjacent to your Territory, froman unoccupied territory at a cost of $0.57 per owner-occupied home located within that unoccupied zip code (the “Purchased Postal Codes”). All Purchased Postal Codes will be included in your defined Territory, and all references to “Territory” include the Purchased Postal Codes; provided that, if any Purchased Postal Code would increase the number of owner-occupied homes in your territory to120,000 or more, we will require you to purchase the additional territory that includes such Purchased Postal Code under a separate Franchise Agreement. You must pay the initial franchise fee in full whenyou sign the Franchise Agreement. The initial franchise fee is fully earned upon receipt. The initial franchise fee is non-refundable except as provided in the following sentence. We may refund your initial franchise fee if you do not pass our required training in accordance with our current passing standards for such training, provided that you return to us all materials which we distributed to you during training. Financing for the initial franchise fee may be available as noted in Item 10. The registration fee for one attendant for your first year’s attendance at Reunion is included in the initial franchise fee. Any additional attendees and guests must pay the full registration fee at the time of registering for Reunion. The registration fee varies each year and can be up to $1,000 per attendee. We are not obligated to hold the Reunion. If we hold the Reunion and you do not attend the Reunion (including your first Reunion), you will be charged $1,000, which amount may be adjusted annually to reflect increases in the national consumer price index. In 2019, we collected initial franchise fees ranging from $38,500 to $42,500.
Discount Programs Our discount programs are as follows:
VetFran Discount As a member of the International Franchise Association (“IFA”), we participate in the IFA’s VetFran Program. If you are a United States or Canadianhonorably discharged veteran (as such term is defined by us in our sole discretion) who meets ourqualifications for purchasing a franchise, you will receive a $6,000 discount. In determining who is a “veteran,” we may be guided, in whole or in part, by any definitions we find appropriate, including definitions used by the federal government of the United States in determining who is eligible for federal benefits intended for veterans.
Additional Concept Discount We and our affiliates (see Item 1) offer a 10%discount on the initial franchise fee to any franchisee who has been a franchisee for at least 2 years and who purchases another franchise from us (if they are an affiliate’s franchise owner) or one of our affiliates listed in Item 1 (if they are one of our franchise owners) (the “Additional Concept Discount”).
Additional Territory Discount If you have been our franchisee for at least 2 years and you purchase additional territory from us, either by executing an Option to Purchase Agreement or a new franchise agreement, you will receive a 20% discount on the initial franchise fee for the additional territory (the “Additional Territory Discount”).
HIRE Discount for Employees of Franchisees We offer a discounted initial franchise fee to qualified employees of our and our affiliates’ franchisees who (i) have been recommended by their employer, (ii) have been employed by our franchisee or a franchisee of our affiliate for at least 2 years and (iii) otherwise qualify to be our franchisee, calculated as follows (the “HIRE Discount”): Franchises granted by us under the HIRE Discountprogram will generally contain 75,000 or fewer owner-occupied homes. The HIRE Discount applies only to the portion of the initial franchise fee applicable to the first 75,000 owner-occupied homes. You may use the HIRE Discount only once and only in accordance with the subsection in this Item titled “Combination and Application of Discounts.”
Local Jurisdiction Additional Required Training Discount If your jurisdiction has a home inspector licensing law or other laws or regulations that impose additional or unique training requirements that cannot be satisfied through the NIBI Technical Training during the Initial Training Program, you may purchase additional licensing compliance services from us or our affiliate HI Training (to the extent we or HITraining have the ability to offer such services) or from a third-party supplier to assist you in meeting the required licensing criteria. If such training services are not available to be provided by us or our affiliates and you are required to pay a fee to a third party to obtain such required training services, wewill discount your initial franchise fee up to the amount of such third-party fees.
Combination and Application of Discounts You may not combine more than one discount.
Deposit for an Option for Additional Territory If qualified, you may purchase an option for an additional territory by paying us, at the time you purchase your franchise, a deposit of $10,000 for such additional territory and executing an Option to Purchase Agreement (in the form attached to this disclosure document as Exhibit E). Under the Option to Purchase Agreement, at any time prior to January 15 th of the calendar year immediately following the effective date of your franchise agreement, you may purchase the additional territory if you are in compliance with your franchise agreement by paying us the balance of the initial franchise fee applicable to such territory. The $10,000 deposit will be applied to the purchase price. We do not refund your deposit if you decide not to purchase the additional territory.
Referral Fee Currently, we offer a referral incentive program that pays $5,000 to an existing franchisee who directly refers a candidate to us who becomes a new HouseMaster franchisee in a new location within 6 months of the date of referral. The incentive payment is only paid with respect to the first franchise purchased by the referred new franchisee and other limitations may apply. We may change or eliminate the referral program at any time without notice. Franchisees participating in the referral program are not our sales agents and are not authorized to make any statements on our behalf, including any statements related to the financial performance or prospect for success of any franchise.
Item 8: Restrictions on Sources of Products and Services
You must maintain the highest standards of quality and workmanship in order to provide the highest quality of service to your customers. You must use in the operation of your Business, and in the offer and sale of the services and products we approve, only those techniques, procedures, and supplies we specify in writing. You must offer all, and only such, products and services as we approve from time to time. We may change any of our requirements periodically. We will notify you of any changes to the standards or the Manuals.
Approved Supplies and Suppliers We may furnish you from time to time lists ofapproved supplies and approved suppliers. We reserve the right to require that you only use approved products, inventory, supplies, uniforms, tools, equipment, signs, telephone and internet equipment and service, advertising materials, and other items (the “approved supplies”) in the Business as described in the approved supplies and approved suppliers’ lists, as we may amend from time to time. We also may develop and research new products or services as we determine necessary. We reserve the right to designate a primary or single source of supply for certain products and supplies, and we or our affiliates may be that single source. You must pay the then-current price in effect for any purchases from usor our affiliates. We reserve the right to require you to use a designated service provider to provide call center, call routing, and scheduling services and we may be that designated supplier. (See Item 11 for more information.) You may not contract with an alternative supplier for any products and/or services for which we have designated a supplier. You may purchase from other suppliers if you follow our supplier approval procedures, as described in the Manuals, and obtain our prior written approval. You must give us at least thirty (30) business days’ prior written notice if you wish to purchase from a source other than our approved suppliers. We may require that samples be delivered to us or to a designated independent testing laboratory for testing before our approval is given. You must pay upon demand our (or the third party’s) actual costs of the testing and any related costs/expenses (regardless of whether we grant an approval). We will usually notify you of our decision within 10 days after we receive the test results. Additional or different procedures may be required for approval of services, software or other special items. We reserve the right to revoke our approval at any time upon the supplier’s failure to meet our then-current criteria.
Software and Hardware You must use an on-site inspection report generation software we designate (currently PCExpress) in operating your Business. Currently, for all new franchisees, we will cover the cost of a one-year license to use this software. This includes one-year of free technical support, product upgrades and access to the web-based report delivery system. After the first year, you must pay an annual license renewal fee (as noted in Item 6 and Item 11), directly tothe third-party, to continue to use the software. A franchisee who obtains franchise rights from an existing franchisee must purchase this license directly from the provider or be assigned the license from the selling franchisee, if available. We reserve the right to require you to purchase, license or lease inspection report generation software from us or our affiliate, or from another third party, subject to different terms and conditions than those currently in effect, as noted in Item 6. You must an inspection scheduling software we designated (currently Inspection Support Net) in operating your Business. You must pay the costs for such software (as noted in Item 6 and Item 11) directly to the third-party provider. A franchisee who obtains franchise rights from an existing franchisee must purchase this software directly from the provider or be assigned the license from the selling franchisee, if available. You must use office management and accounting software (currently Quickbooks Online) provided by an approved supplier. You must obtain from us, for a monthly fee, and use in your Business, the Technology Package, which currently includes licenses to Microsoft Office365, LavaSurf (social media/review generation software), PureChat (chat feature), VedeSecure (email security software), and SmartLine, Twilio and Google Phone (secure mobile phone numbers). We may require updates to the required softwarefrom time to time and/or require you to use different and/or additional software, including proprietary software, and you may be required to purchase/enter into software agreements/licenses for such software with usor the third-party supplier, as we specify, and you may be required to pay us or the third-party supplier fees for such software. You must purchase and use computer hardware that meets our specifications and that is compatible with the required software. Specificationsmay include a particular brand or source and we issue specifications to you and maintain them in the Manuals.
Technical Training Our affiliate, HI Training, offers certain technical training to our franchisees. See Item 11 for a description of the training.
Vehicles You must purchase the required vehicle branding (signage or wrap) according to our specifications. Although we do not currently require you to lease or purchase a specified vehicle for the operation of your business, we have negotiated a lease arrangement with a lessor of vehicles for the benefit of our franchisees. If we impose the requirement to lease or purchase a vehicle at some point during the term of the franchise, you will be required to lease or purchase the vehicle from an approved supplier and you will incur the additional expense ofleasing or purchasing a vehicle at that time.
Marketing and Office Materials All advertising and promotional materials, signs and other items we designate must bear the Marks (see Item 13) in the form, color, location and manner we specify. Your advertising and promotion must meet our standards as described in the Manuals or otherwise by us in writing. You must purchase stationary from our approved suppliers. You may prepare and use your own advertising or promotional materials provided that we have approved them in writing prior to use.
Telephone Numbers and Electronic Identities The telephone numbers and electronic identities you use in connection with the Business must be owned and controlled by us or an approved supplier. We require you to “port” or transfer to an approved call routing and tracking supplier all phone numbers associated with the Business or published in any print or online directory, advertisement, marketing or promotion associated with the Marks and/or the Business.
Purchasing Arrangements and Rebates We do not provide you with any material benefits based on your purchase of particular products or services, or your use of designated or approved sources. We currently receive rebates that are basedon franchisees’ purchases from our suppliers OneSource and OSP/Curtis 1,000, in the form ofa flat amount per unit sold to franchisees. Our affiliate, ProTradeNet, negotiates and entersinto purchase arrangements, which may include discounted pricing, special terms, rebates or other incentives with suppliers for the benefit of our franchisees. We may also negotiate or enter into these types of arrangements directly. ProTradeNet has and may enter into relationshipswith other buying groups, which may include competitors, for the purpose of improving negotiating strength and purchase volume for the entire group. We or an affiliate (including ProTradeNet) may make available to you the opportunity to participate from time to time in certain discounts, rebates, or other benefits in connection with approved suppliers (collectively, “Rebates”), if you meet certain conditions, such as supplier terms and conditions and attendance at annual meetings. All Rebates not returned to franchisees may be retained by us or our affiliate (including ProTradeNet) and used to cover administrative costs or to promote our system and brands. In most instances, but subject to change and vendor relationships, ProTradeNet will retain 25% of all Rebates, pay 25% of all Rebates to us and pay 50% of all Rebates to you, the franchisee, based on qualifying purchases. Some suppliers may also pay additional fees for advertising, which fees range from $200 to $15,000; for marketing, which fees range from .1% to .3% of total qualified purchases by franchisees from the supplier; and for sponsorships, and tradeshow space, which fees range from $500 to $200,000, for the purpose of promoting their product or service to franchisees. All of these amounts and percentages, including the percentages of Rebates retained by ProTradeNet and paid to us and to you and all additional fees, may change in the future at our sole discretion. Rebates are typically paid on net sales for qualified purchases and ProTradeNet may or may not from time to time include purchases made by the MAP Fund in our rebate program. If MAP Fund purchases are included as qualified purchases ProTradeNet will allocate 100% of the rebates from those purchases to the MAP Fund. The agreement you are required to sign with ProTradeNet to participate is included as Exhibit H hereto, and additional terms and conditions, which may change from time to time, are included on the ProTradeNet website, www.protradenet.com. While you are required to enter into the ProTradeNet Agreement, you are not required to purchase any items under the ProTradeNet Program except as otherwise stated in this disclosure document or required by your Franchise Agreement, our Manuals or our policies and procedures. However, certain benefits, Rebates and special pricing will be available to you only if you participate on the terms required by ProTradeNet or each individual supplier. We may derive revenue as a result of your required purchases. Amounts listed below are based on cash received and cash disbursed. Some Rebates may be received and the portion of any that are disbursed may be held until the next national meeting before being disbursed. Not all suppliers provide Rebates. A complete listing of suppliers providing Rebates and their rates is available from ProTradeNet. o In the year ending December 31, 2019, ProTradeNet had revenue of $0, or about 0% of its total revenues of $2,541,833, from purchases by HouseMaster franchisees. These figures were taken from ProTradeNet’s financial statements for the year ending December 31, 2019. o In the year ending December 31,2019, we had revenue of $66,511, or about 1.4% of our total revenues of $4,871,018, as a result ofpurchases by HouseMaster franchisees from approved suppliers or under our specifications or as a result of purchases, if any, directly from us. These figures were computed internally. o In the year ending December 31, 2019, our affiliate ZorWare had revenue of $0 or about 0% of its total revenues of $5,394,071 from the required purchases or payments by our franchisees for initial training and maintenance and monthly support. These figures were taken from ZorWare’s financial statementsfor the year ending December 31, 2019. o We or our affiliates may receive a commission from the brokerage of a capital lease or other equipment finance, should you require financial assistance from third parties. You must comply with all terms and conditionsapplicable to these programs to receive the discount or Rebate. Additional information is available by contacting us. These programs may be changed or discontinued at any time. Other than the ProTradeNet program described above, we do not currently participate in any purchasing or distribution cooperatives. We or our affiliate(s) may from time to time negotiate purchase arrangements with suppliers (including price terms to the extent permitted by law) for the items and services described in this Item 8 that you may obtain only from designated sources.
Key Accounts Program We may, but have no obligation to, offer a Key Accounts or similar program. From time to time we evaluate opportunities for Key Accounts which mightbe best administered through our parent, an affiliate or a third party, as we determine in our discretion. If we establish a Key Accounts program, you may participate in it and conform to the standards and procedures of that program. We, Neighborly Service Solutions and/or a third party we select, may solicit Key Accounts for the franchisees of certain franchise systems affiliated with our Parent, including us. A “Key Account” is a customer account which may be national or regional and cover multiple customer locations (withinand/or outside your Territory) with whom we have entered into arrangements (i) for servicing of multiple locations of such customers and/or (ii) that we determine are designed to benefit the System as a whole by gaining otherwise unavailable business or addressing the concerns of suchcustomers that may require specific terms or provisions of our arrangement with them, including without limitation special insurance, experience, equipment, pricing, payment terms, turnaround requirements, or approvals. A Key Account is generally, but not always, a large organization with multiple locations that need products and services provided by franchisees in our franchise system and/or the franchise systems of our affiliates around the country or in a region or other area. The agreement to provide services may be formal or informal and the account may be administered by us, an affiliate or a designee of ours. In some cases our Key Accounts program provides a central number customers may call for those services. If you elect to participate in our Key Accounts program, you must comply with the terms we specify, which may include provisions that require the payment of management fees or other fees, including sales commissions or similar payments, offering of special products or services at certain times or for certain prices (to the extent allowed by law) and special insurance, indemnity, quality control and other provisions. You may also be required to enter into additional agreements required by a Key Accountor our policies and procedures. The Key Accounts administrator may collect payments from Key Accountcustomers and distribute payments to franchisees for work provided but has no obligation, and we have no obligation, to makeany payments to you for work to the extent payment in good funds by the Key Accounts customer has not been made to us or the administrator. We and/or the administrator of the Key Accounts program have the right to charge additional amounts, including commissions or other fees or charges, to third parties and/or to Key Account customers on account of work performed on Key Accounts by you or other third party service providers.
Insurance Before you begin operating your Business, you mustpurchase, and maintain at all times during the term of your franchise agreement, at your cost, insurance coverage, from a responsible carrier, with an A.M. Best rating of A-VIII or better, with the coverage amounts, types and other features as we from time to time specify, using the insurance industry form(s) acceptable to us, and such other insurance coverage as required by law and any other agreement related to the Business. Any person or entity with an insurable interest that we designate (each, an “Additional Named Insured”) mustbe named an additional insured on all required liability policies. Each insurance policy must contain a waiver of subrogation in favor of the Additional Named Insureds. Your insurance must apply as primary and non-contributory. Currently, our minimum insurance requirements include(i) comprehensive general liability insurance, with a combined single limit in the amount we specify, currently $500,000 in the aggregate (Including Personal Injury and Advertising Injury); (ii) motor vehicle liability coverage, combined single limit in the amount we specify, up to$2,000,000 but no less than$500,000, on each owned, non-owned or hired vehicle used in connection with the Business; (iii) workers’ compensation coverage if required by state law, with minimum coverage as required by state law (if applicable); (iv) an errors and omissions (“E&O”) liability insurance with (x) bodily insurance coverage (for injury resulting from services performed) for all inspections and services performed and including prior acts coverage and which must be maintained after termination or expiration ofyour Franchise Agreement for as long as necessary to provide coverage for claims and liability arising from all inspections performed by you prior to the termination or expiration, but for no less than 3 years (the “E&O Tail”) and (y) which includes cyber liability insurance for financial losses arising from unauthorized access, loss or corruption of data, including but not limited to privacy and data security breaches, misdirected funds, virus transmission, denial of service and loss of income from network security failures, with a limit of liability not less than $500,000 per occurrence and $1,000,000 in the aggregate; and (v) such other insurance as from time to time required by us, under applicablelaw and under other agreements applicable to your Business. In connection with the provisionby your Business of home inspection services, you may offer participation in the Referral Liability Protection Program, pursuant to which selected persons or organizations would be designated to be added to the Business’s professional liability policy as an additional insured. If you offer the Referral Liability Protection Program to persons or entities that recommend your service such as real estate service providers, including attorneys,mortgage lenders and realtors, you must have an E&O insurance policy that also provides coverage for these parties. It is your responsibility to ensure that your E&O provider approves any communications or marketing programs that you use to promote the Referral Liability Protection Program. In connection with the provision by your Business of home inspection services, you may offer participation in the Seller Liability Protection Programto home sellers, pursuant to which a home seller could be added to the Business’s professional liability insurance policy as an additional insured. This program would cover such home sellers for defense costs up to the Business’s limit of liability in excess of the applicable deductible in connection with a claim from the buyer of the property. If you offer the Seller Liability Protection Program to home sellers, you must have an E&O insurance policy that also provides this coverage. It is yourresponsibility to ensure that your E&O provider offers this coverage and approves any communications or marketing programs that you use to promote this program. Although the use of independent contractors isnot encouraged, if you do use independent contractors for the performance of inspections and ancillary services to customers, you must ensure adequate E&O insurance coverage for their services as identified in the Franchise Agreement. You, Franchisor and HI Training must be named as additional insureds on their insurance policies. We currently make E&O insurance available to you through a group program. While participation in this program is not currently required, we reserve the right to require you to participate. With respect to Key Accounts, if the insurance amount required for any Key Account or for Key Account work in general exceeds the amount specified as the maximum amount required by us for any type of insurance, that higher amount required for the Key Account work will apply. Additional insurance requirements are described in the Manuals. You may satisfy the insurance coverage limits through an umbrella policy that meets all the requirements of this Section. If you fail to procure the E&O Tail within 30 days of expiration or termination of the Franchise Agreement, you will be assessed a fine equal to the greater of $5,000 or the cost of the E&O Tail plus a reasonable fee for expenses we incur. If you fail to purchase or maintain any other required insurance, we may, but are not obligedto, obtain such insurance for you and keep the same in force and effect, and you must pay us, on demand, all premiums charged for such insurance policies together with a reasonable fee for the expenses we incur in doing so. We also have the right to terminate your Franchise Agreement for cause if you fail to comply with our insurance requirements. You must deliver to us at commencement and thereafter annually or at our request a proper certificate of insurance evidencing the existence of the required insurance coverage. We also may request copies of all insurance policies. We may modify the required minimum limitsand types of coverage, by written notice to you. Upon such notification, you must immediately implement the modification of the policy, and provide evidence thereof, in accordance with our request.
Accounting Software and Other Requirements We recommend that you engage the services of a certified public accountant to assist you with the set-up of your books and records, in using the appropriate chart of accounts that we require and in producing monthly and annual compiled financial statements. If you request, wewill provide you with information about companies we are aware of that offer these services to our franchisees. We require that you use an appropriate chart of accounts, comply with our operating procedures and specifications, including internal audit standards, and use our required software. We currently require that you use Quickbooks Online from our designated vendor, Intuit Limited. We may, upon demand, require you to provide us, within the time as we specify, with audited financial statements, using an independent certified public accountant designated by or satisfactory tous, to adopt a fiscal year consistent with ours, to cooperate with our auditors and to comply withsuch additional requirements as may be reasonably necessary to enable us to meet our obligations under Generally Accepted Accounting Principles and to comply with applicable accounting standards and rules. None of our officers currently have an ownership interest in any approved supplier. The cost of items purchased in accordance with our specifications represents approximately 17% to 29% of your total purchases in connection with the establishment of your Business and approximately 3% to 7% of your on-going purchases in connection with operation of your Business. Other than the items described in this Item 8, and the required purchases of promotional material you must obtain from us or our designee, we do notcurrently derive revenue from your purchases or leases.
Item 10: Financing
We have no obligation to provide you any financing, but we may agree to finance a portion of the initial franchise fee for qualified prospective franchisees under specified terms and conditions. Our decision to finance the initial franchise fee will be based, in part, on your credit-worthiness, the collateral you have available to secure the financing and our then-current financing policies. We do not provide any financing in any transaction inwhich brokers are involved. We limit the amount that we will finance – currently to an amount less than 50% of the total equity, debt and other financial support of your Business (collectively, “obligations”). You must make a written representation to us, in a form we specify, confirming the dollar amount of your obligations. The representation must remain true through execution ofyour franchise agreement and we may elect not to approve a transfer, including a transfer to a corporation or other entity whollyowned by you, if you do not either maintain the same investment in your Business or pay any loans payable to us and our Affiliates in full. Subject to the obligation limit, our standard financing is up to 70% of your initial franchise fee, and we may agree, in our sole discretion, to finance up to 80% of your initial franchise fee if you meet certain requirements.
You must qualify to purchase a franchise, meet ourcredit standards and be otherwise eligible for financing to qualify for the following interest rates. Wecurrently charge an interest rate based on your credit score as follows: If we agree to finance a portion of the initial franchise fee, you must sign a promissory note when you sign the Franchise Agreement. An example of ourpromissory note is attached as Schedule G to the franchise agreement. You must pay us the down payment when you sign the franchise agreement and pay the balance in monthly installments.
You must make note payments to us by automaticbank draft. Some banksand other financial institutions may charge a fee for electronic transfers butthese electronic transfer fees are often negotiable.Monthly payments will begin approximately 2 months after you complete our Initial Training Program. The length of the repayment termmay be negotiable but will generally follow these guidelines:
We require a security interest in the franchise. You must sign a security agreement, substantially in the form included in the promissory note attached as Schedule G to the franchise agreement, on all your assets, including after acquired property and wewill file a UCC financing statement with the appropriate governmental authority. We have the right to require additional forms of security. You may prepay the note at any time without penalty. If you default, we may declare the entire remaining amount due. If you do not pay us the entire balance, and any accrued, unpaid interest, you may be responsible for the court costs and attorneys’ feeswe incur in collecting the debt from you. We may terminate your franchise agreement if you do not pay us.
You must waive your rights to certain notices ofa collection action in our promissory note, security agreement and guaranty but there are no waivers of defense in our promissory note, security agreement or guaranty. If you are a legal entity, your shareholders, members, partners and/or owners must personally guarantee the debt and agree to pay the entire debt and all collection costs. We have the right to require a spouse’s personal guaranty. The financing described in this Item 10 is provided by us, HM Services, LLC. We may sell, assign or discount any promissory note or other obligation arising out of the franchise agreement to a third party. If we sell orassign your promissory note, it will not affect our obligation to provide the services to you that are described in the franchise agreement but the third party may be immune under the law to any defenses to payment you may have against us.
We may periodically agree with third party lendersto make financing available to our qualified franchisees and we may, in our sole discretion, refer you to a third party lender for financing. We have no control over whether financing will be offered toyou by any third party lender. The lender is not obligated to provide financing to you or to any other franchisee that the lender finds does not meet its credit requirements and loan criteria. If we refer you to a third party lender for financing, we may agree to take a short-term promissory note (in a form we provide to you) until your financing is arranged. You must use the proceeds from the lender topay any promissory note to us. We do not currently derive incomefrom referrals or placement of financing with any third party lender. However, we may require payment from you orother persons for the placement of financing in the future. If we charge for placing financing in the future, we expect to use the payments to offset our expenses in doing so. We do not guarantee your obligations to third parties.
We may, in limited circumstances, agree to finance a portion of any renewal fee for qualified franchisees at a 12% interest rate under specified terms and conditions. Our decision to finance a renewal fee will be based, in part, on your credit-worthiness, the collateral you have available to secure the financing, and our then-current financing policies.
Item 12: Territory
You will receive the right to operate the Business ata location within your territory that meets our site selection guidelines (the “Franchise Location”).Your Franchise Agreement will also specify a designated territory that will provide you limited territory protection (the “Territory”). The Franchise Agreement does not grant you any territorial rights beyond the Territory except as described in this item 12.
We estimate that your Territory will have generally approximately 75,000 owner-occupied homes. You will maintain rights to your Territory even if the population in your Territory increases. We rely on the census to determine the number of owner-occupied in a Territory. While we believe the data to be accurate within an acceptable margin of error,there is no way to know the actual number of owneroccupied homes. The actual number of owner-occupied homes may be more or less than 75,000. We may, in our sole discretion, permit you to add Purchased Postal Codes. All Purchased Postal Codes will be included in your defined Territory, and all references to “Territory” include the Purchased Postal Codes; provided that, if any Purchased Postal Code would increase the number of owner-occupied homes in your territory to 120,000 or more, we will require you to purchase the additional territory that includes such Purchased Postal Code under a separate Franchise Agreement.
If you wish to relocate from your Franchise Location to a new business site, we will authorize you to do so; provided (1) you are not in default of the Franchise Agreement, any other agreements with us, or the lease for the former Franchise Location, (2) you are current on your financial obligations to us and our affiliates and all your third party creditors, (3) you open for business at the new location on the same day you close your former Franchise Location,and (4) the new business site is within your Territory. You may operate from your home if your home is located within your Territory and if local zoning permits or from any existing business premises.
You will not receive an exclusive territory. You may face competition from other franchisees, from outlets we own, or from other channels of distribution or competitive brands that we, our affiliates or third parties control, operate or franchise. However, provided you are in full compliance with your Franchise Agreement, we will not operate or grant a franchise for the operation of another HouseMaster franchise with rights to market within your Territory during the term of your Franchise Agreement.
We reserve all other rights not specifically granted to you, includingthe right, while your Franchise Agreement is in effect, to sell or allow others to sell: any products or services anywhere using different trademarks; the same or similar productsand services, competitive with those you will provide, anywhere using different channels of distribution; different products and services anywhere using the Marks; or the same products and services using the same trademarks anywhere inside or outside your Territory. In addition, we may advertise, solicit and enter into Key Accounts, which are national, regional or other accounts we believe will benefit the system as further described in the Franchise Agreement, the Manuals and Item 8, and Key Accounts may involve marketing in your Territory. In addition to allowing others to offer products and services in your Territory generally, in the specific case when a Key Account is involved we may also designate or authorize a corporate employee, another franchisee or any other third party to perform or assist you in performing services within your Territory if you refuse or, in our judgment, are not qualified, interested, able or available to perform services for any customer in the Territory, including any Key Account customer; if you request assistance; or if a customer, orally or in writing, specifically requests services inthe territory from a different franchisee or any other third party. If you agree to participate in or service Key Accounts, you must do so on the terms we specify, which terms may include, but may not be limited to, the provision of certain insurance, equipment, products and services, and the offer of services at prices not to exceed the maximum prices specified as well as payment by you of any applicable sales or broker commissions. If others provide services in your Territory, you will not be entitled to any compensation for the sales or services performed. Subject to the rights granted to you in your Franchise Agreement, wemay provide in the Manuals for other programs in which we offer and sell, and/or authorize others to offer and sell, using the Marks or other marks, goods and services in your Territory that are identical or similar to and/or competitive with those provided at your Business. We may also acquire businesses or be acquired by a business offering similar products and services anywhere.
You cannot advertise for or attempt to solicit customers for any products or services, including using Internet, telemarketing or other direct marketing, outside your Territory, except for the following limited activities: (i) you may target market past homeinspection customers to maintain the relationship regardless of the customer’s location and (ii) you may conduct in-office marketing in the physical office of the board of realtors and Chambers of Commerce even if the physical offices are located outside of your Territory. Further, if you are hosting or attending an event for the purpose of marketing to professionals whose business footprint encompasses multiple offices including those that are in another franchisee’s territory you must share the branding of the event and distribute materials of other HouseMaster franchisees who service those territories. You may also be required to contribute to a marketing program or activity with an organization that has locations in your Territory that is being coordinated by another HouseMasterfranchisee who owns a territory within the footprint of the organization. You may not otherwise advertise, market or promote your Business or solicit customers outside of your Territory without our prior written consent, which consent we may give, condition or withdraw as we deem appropriate.
In the past, we granted exclusive territories to franchisees in certain areas (referred to as a Limited Area Franchise Territory or a Reciprocal Opportunity Franchise Territory). We are no longer granting Limited Area Franchises or Reciprocal Opportunity Franchise Territories, and there are very few existing franchisees that still have this territory structure. If you are one of these few existing franchisees, when you execute a renewal Franchise Agreement, you will be requested to convert your territory structure and/or may be entitled to retain the Limited Area Franchise Territory.
You may conduct inspections and provide other related services anywhere other than in an existing franchisee’s Limited Area or ReciprocalOpportunity Franchise Territory (“Excluded Territories”). You are solely and fully responsible for identifying which areas are Excluded Territories, by, for example, contacting us for this information.For your information, you will be provided a list of Excluded Territories within a 50-mile radius of your Franchise Location at the time your Franchise Agreement is signed. Other franchisees may also conduct inspections and provide related services anywhere.
Our Manuals may also set specific rules for engaging in, and what may constitute, marketing within your Territory and other related matters, including what telephone area codes and exchanges may be used within the Territory (depending on the areas covered by those area codes/exchanges); which publications or media you may advertise in (depending on whether the circulation of the publication/media is wholly or mostly within your Territory); participation in promotional events, tradeshows, continuing education programs, chambers of commerce and industry association meetings; the post office box or mailing address that may be displayed on advertising; which phone numbers may be displayed on your vehicles; how, when and from which customers or accounts you may solicit work (depending on their location and the location and/or duration of the work); requirements for referral of work; enforcement, administration and interpretationsof provisions of marketing/territory rules and procedures; and other matters; and these rules may change in our sole discretion.
If you impermissibly conduct an inspection in anExcluded Territory or if you engage in prohibited marketing activities, you must pay us a fineof the greater of $5,000 for each occurrence or 50% of business generated from the infringing activity. The fine is in addition to our right to terminate your franchise. We do not otherwise limit or restrict your solicitation of customers in your Territory. Neither we nor any other party are required topay you as a result of us exercising in your Territory any of our rights described in this Item 12. We do not generally grant any right of first refusal to obtain additional territory. You may, if qualified, purchase an option, for a limited amount oftime, to purchase additional territory by paying us, at the time you purchase your franchise, a fee of $10,000 for the territory you wish to buy. You must enter into an Option to Purchase Agreement. At any time prior to January 15th of the calendar year immediately following the effective date of your franchise agreement, you may, if you are in compliance with your franchise agreement, purchase the additional territory by paying us the balance of the initial franchise fee. The $10,000 deposit will be applied to the purchase price. We do not refund your deposit if you decide not to purchase or do not qualify to purchase the additional territory. You may also acquire additional territory during the term of the franchise agreement by entering into another franchise agreement or, at our option, an amendment to yourexisting franchise agreement, for the additional territory.
When you purchase additional territory, whether or not through the Option to Purchase Agreement, we may require that you sign a general release releasing us from all claims you may have except claims that under state law may not be released. To qualify for a purchase of an additional territory, we may set a performance threshold you must meet, which may require you to meet or exceed the average annual Gross Sales of the lowest, in terms of Gross Sales and customer sales reported to us, 50% of the franchised businesses operating under our System that signed an initial franchise agreement in the same year you signed your initial franchise agreement. If you do not qualify for renewal of your Franchise Agreement, we may, in some cases, but are not required to, offer to enter into a franchise agreement with you for a smaller territory and you would then have the option to accept thatterritory on the terms offered.
Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
If you are an individual, you must directly perform or supervise the operation of the Business unless we consent otherwise. You must obtain and maintain an immigration status that will allow you to live and work in the United States for the initial termof the Franchise Agreement and for the length of any renewal terms of the Franchise Agreement. If you do not have or maintain the required status, the Franchise Agreement will immediately expire by its terms with no further notice or opportunity to cure and we will have no liability to you, and no refund of any fees will be made. However, you will remainbound by all post-termination obligations in the Franchise Agreement, including all obligations regarding noncompete, de-identification, confidentiality, and indemnity.
If we agree that you need not personally perform or supervise operation of the Business, an individual who has successfully completed our training program (“manager”) must directly supervise the Business, and that individual must be a bona fide manager, as determined by us. If we ask, the manager must sign a written agreement to maintain confidentiality of the trade secrets described in Item 14.
If you are a corporation or other legal entity, direct, on-site supervision must be done by a designated owner who has successfully completed ourtraining program unless we consent otherwise (“principal owner”). If we ask, the principal owner must sign a written statement to maintain confidentiality of the trade secrets described in Item 14 and to conform to the covenants not to compete described in Item 17. If we agree that a principal owner need not personally perform or supervise the operation of the Business, a manager must directly supervise the Business. The manager need not have an ownership interest in the Business. If you are a corporation or other legal entity, your principal shareholders, members and/or owners must sign a Guaranty agreeing to pay and perform all obligations under the Franchise Agreement (attached tothe Franchise Agreement as Schedule C).
While you own the Business, you cannot have an interest or relationship with any competitors. If you own an existing business when you sign the Franchise Agreement, we may (in our sole discretion) allow you to exclude such business from the Business by executing the Excluded Services Addendum attached as Schedule I to the Franchise Agreement. If such existing business is rolled into the Business, you will execute and become bound by the Roll-In Addendum (attached as Schedule H to the Franchise Agreement).
Item 16: RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL
Franchise Agreement You must offer and sell only the goods and services that conform to our standards and specifications. You must offer the goods and/or services that we designate as required for all franchisees and you may elect to offer other products and/or services only if weapprove them in advance. We may change the authorized services and/or products that we require you and all franchisees to offer by adding additional services and/or products or deleting products and/or services, or both and there are no limits on our right to make changes. If we makeany changes, we will notify you. We have no plans to make significant changes in the future. You must comply with all applicable lawsand regulations and obtain all appropriate governmental approvals for the Business including obtaining a license if required by your locality. To ensure that the highest degree of quality and service ismaintained, you must operate in conformity with the methods, standards and specifications in the Manuals and as we may otherwise require in writing periodically. You must not deviate from our standards and specifications without our prior written consent. We do not limit or restrict your solicitation of customers in your Territory, although we own all customer information and may use the customer information as we deem appropriate (subject to applicable law), including, without limitation, sharing it with our affiliates for cross-marketing, customer loyalty programs or other purposes. For example,”Own the Home” is our Parent’s current cross branding initiative where we intend to increase cross utilization of Neighborly brands by consumers and drive consumer awareness via getneighborly.com and other marketing programs. You cannot advertise for or attempt to solicit customers for any products or services, including using Internet, telemarketing or other direct marketing, outside your Territory, except for the following limited activities: (i) you may target market past homeinspection customers to maintain the relationship regardless of the customer’s location and (ii) you may conduct in-office marketing in the physical office of the board of realtors and Chambers of Commerce even if the physical offices are located outside of your Territory. Further, if you are hosting or attending an event for the purpose of marketing to professionals whose business footprint encompasses multiple offices including those that are in another franchisee’s territory you must share the branding of the event and distribute materials of other HouseMaster franchisees who service those territories. You cannot provide mentoring services for an inspector that is not part of the HouseMaster franchise system, whether within or outside your Territory and whether complimentarily offered or for a fee, without our prior express written consent. If you have an immediate family member (i.e., spouse, former spouse or offspring) who is engaged in the real estate brokerage business, you cannot provide services to any customers referred by the family member. Also, you must provide written disclosure to customers if you do have a family member in the real estate brokerage business in your territory. This restriction is imposed to avoid a conflict of interest.
To view the full Franchise Disclosure Document, please click here