Explanation

Item 20 data shows the system is growing at a steady pace, adding a net of 10 franchised units in the most recent year. While rapid growth can strain support systems, the rate disclosed here does not immediately appear to be unsustainable. The franchisor's financials in Item 21 show increasing net income, suggesting they may have resources to support current growth levels. However, the quality of that support should be verified.

Potential Mitigations

• Interviewing a broad range of existing franchisees, both new and established, about the current quality and responsiveness of franchisor support is recommended.
• Engage a business advisor to assess whether the franchisor's support infrastructure seems adequate for its size and growth trajectory.
• Your accountant can review the franchisor's investment in support-related expenses as detailed in their financial statements.

Explanation

This risk was not identified in the FDD package. The business model, retail mattress and furniture sales, is a well-established industry and does not appear to be based on a short-term trend or fad. However, any retail concept's success depends on adapting to changing consumer habits and economic conditions. A business that fails to evolve could face declining demand over the term of your agreement, regardless of the industry's stability.

Potential Mitigations

• A business advisor can help you research the long-term market trends for this specific retail sector in your local area.
• It is prudent to ask the franchisor about their strategies for innovation and adapting to shifts in consumer purchasing behavior.
• Working with your accountant, you should assess the business model's resilience to economic downturns.

Explanation

This risk was not identified in the FDD package. The executive team listed in Item 2 appears to have relevant, long-term experience within the company, its parent (RSS), and the broader furniture and retail industries. Lack of management experience can be a significant risk, as it may lead to poor strategic decisions and inadequate support for franchisees. However, the disclosed experience here seems appropriate for the business.

Potential Mitigations

• Engaging a business advisor to help you review the backgrounds of the key management team is a good practice.
• You should ask current franchisees about their direct experiences with the management team's competence and support.
• Your attorney can help you understand the management structure and decision-making authority within the franchise system.

Explanation

This risk was not identified in the FDD package. The FDD does not disclose ownership by a private equity firm. The franchisor is a subsidiary of Retail Service Systems, Inc. Private equity ownership can sometimes lead to a focus on short-term profits over the long-term health of the franchise system. It is a risk factor to be aware of in any franchise, as the franchisor can typically sell the system to a new owner, including a PE firm, without franchisee consent.

Potential Mitigations

• Your attorney should review the assignment clause in the franchise agreement to understand the franchisor's rights to sell the system.
• It is wise to ask the franchisor about their long-term ownership goals for the company.
• A business advisor can help you understand the potential impacts if the franchise were to be sold to a different type of owner in the future.

Explanation

This risk was not identified in the FDD package. Item 1 clearly discloses the parent company, Retail Service Systems, Inc. (RSS), and its role. Item 21 provides audited financial statements for the franchisor, BoxDrop, LLC. Because BoxDrop, LLC is a wholly-owned subsidiary and has significant related-party transactions, the financial health of the parent is important. While the parent's financials are not included, the franchisor's own financials are provided and audited, meeting the primary disclosure requirement.

Potential Mitigations

• Your accountant should review the provided financials and the notes regarding related-party transactions.
• Asking your attorney about the legal relationship and obligations between the parent and the franchisor is advisable.
• You could ask the franchisor if they are willing to provide financial information on the parent company for a more complete picture of the enterprise.

Explanation

This risk was not identified in the FDD package. Item 1 discloses that the franchisor's parent, RSS, acquired the franchise concept from predecessors (PMD entities). Item 3 and Item 4, which disclose litigation and bankruptcy, do not list any actions involving these predecessors. An incomplete disclosure of predecessor history could hide past problems, but the information here appears to meet disclosure requirements.

Potential Mitigations

• It is good practice to have your attorney review the predecessor information in Items 1, 3, and 4.
• Speaking with long-term franchisees who may have operated under the predecessor could provide valuable historical context.
• A business advisor can help you research the public records of any predecessor entities for additional information.

Explanation

This risk appears to be low. Item 3 discloses one pending lawsuit filed against the franchisor's parent company (RSS) and its CEO by a former law firm over legal fees. While any litigation is a concern, this case does not involve claims of fraud, misrepresentation, or breach of contract by franchisees. The absence of a pattern of franchisee-initiated litigation alleging such claims is a positive indicator. The franchisor also discloses an ongoing trademark opposition proceeding, which is a business dispute.

Potential Mitigations

• A full review of the details of any disclosed litigation with your attorney is crucial to understand its potential impact.
• Inquiring with the franchisor about the status and potential outcomes of any pending lawsuits is a reasonable step.
• Your business advisor can help you assess if the disclosed litigation poses any operational or financial risk to the franchise system.