Explanation

Item 20 data for the most recent fiscal year shows a relatively low turnover rate, with a total of nine franchised outlets ceasing operations, being terminated, or not renewing out of a base of 462. This suggests a degree of stability in the system over the past year. However, you should evaluate the multi-year trends and the reasons for these departures as part of your due diligence.

Potential Mitigations

• With your business advisor, contact a significant number of current and former franchisees from the lists in Exhibits K-1 and K-2 to discuss their experiences.
• Investigate the specific circumstances behind the terminations and ceased operations with your attorney.
• Ask your accountant to analyze the three-year trend data for any signs of increasing turnover.

Explanation

While the system experienced rapid growth in the fiscal year ended 2023 (adding 26 net new franchises), the growth has slowed considerably in the last two fiscal years, with a net increase of only one franchised outlet over that period. This suggests the franchisor is not currently undergoing a period of excessively rapid expansion that might strain its support systems. The franchisor has also divested all of its company-owned stores.

Potential Mitigations

• A discussion with your business advisor regarding the system's growth trajectory and its implications for brand recognition is worthwhile.
• Inquire with current franchisees about the quality and consistency of the support they receive from the franchisor.
• Your attorney can help you understand the support obligations outlined in the Franchise Agreement.

Explanation

This risk was not identified. Big O Tires, LLC (Big O) and its predecessors have been in the tire and automotive service business since 1962 and have been franchising for decades. The management team disclosed in Item 2 generally has extensive experience within the industry and with the parent company, TBC Corporation. The system is well-established and mature, not an unproven startup.

Potential Mitigations

• It is still prudent to have your business advisor evaluate the franchisor's history and the experience of the current management team.
• Speaking with long-tenured franchisees can provide valuable insight into the system's evolution and stability.
• Your attorney should confirm that the disclosures regarding the franchisor's history and experience appear complete and compliant.

Explanation

This risk was not identified in the FDD package. The business model, focusing on retail tire sales and automotive services, is a long-standing and established industry. It is not based on a recent trend or novelty. This suggests a lower risk of being a business fad with limited long-term consumer demand.

Potential Mitigations

• A business advisor can help you analyze the long-term prospects of the automotive repair and tire industry in your local market.
• It is beneficial to assess the company's strategies for adapting to industry changes, such as the rise of electric vehicles.
• Understanding the competitive landscape with a marketing professional can help you gauge the business's staying power.

Explanation

This risk was not identified in the FDD package. The executive team described in Item 2 has significant experience in the automotive and tire industry, with most senior leaders having long tenures at Big O or its parent companies, like TBC Corporation. This indicates a management team with deep industry knowledge and familiarity with the franchise system's operations.

Potential Mitigations

• It is still beneficial to review the specific backgrounds of the key managers responsible for franchisee support and operations with a business advisor.
• Speaking with current franchisees can provide direct insight into their perception of the management team's competence and effectiveness.
• Your attorney can help you understand the franchisor's obligations for providing support and management assistance as detailed in the Franchise Agreement.

Explanation

This risk was not identified in the FDD package. The franchisor, Big O, clearly discloses its parent companies up to TBC Holdings, LLC. Furthermore, the FDD includes the audited consolidated financial statements for TBC Holdings, LLC, which also provides a performance guarantee. This provides financial transparency for the ultimate parent entity responsible for the franchise system.

Potential Mitigations

• Your accountant should review the provided parent company financial statements and the terms of the guarantee.
• It is still wise for your attorney to confirm that the disclosed corporate structure accurately reflects the chain of ownership and control.
• A business advisor can help you understand the operational relationship between Big O and its parent companies.

Explanation

The FDD discloses a predecessor, Big O Tire Dealers, Inc., which was merged into the current company in 1986. While Item 3 discloses past litigation involving franchisees, the specific history related to the predecessor entity is decades old and may have limited relevance to the current operating environment. The document appears to properly disclose the predecessor's existence.

Potential Mitigations

• Your attorney should review the disclosures related to the predecessor to ensure they comply with legal requirements.
• While its relevance may be limited due to age, asking long-tenured franchisees about the system's history could provide some context.
• A business advisor can help you assess how the system may have evolved since the predecessor's time.