Explanation

The franchisor, Byrider Franchising Partners, LLC (Byrider Franchising Partners), is a new entity formed in August 2024. Its financial statements explicitly note the acquisition from a predecessor experiencing “financial and operational hardships,” confirmed by a $2.8M “gain on bargain purchase.” The FDD also includes a “Special Risk” warning about financial condition. This combination indicates a significant risk regarding the franchisor’s ability to support the system, as its own operational history is extremely limited and it acquired a distressed system.

Potential Mitigations

• Your accountant must meticulously analyze the franchisor's balance sheet, particularly its capitalization and reliance on the one-time gain from the acquisition.
• An attorney should review any guarantees or financial assurances from parent companies, given the franchisor's limited operating history.
• Engaging a business advisor to assess the turnaround strategy for the distressed system is critical.

Explanation

The franchise system has experienced extremely high turnover. In 2024, the system saw a net loss of 26 franchised units, with 20 terminations and 9 cessations from a starting base of 112. This represents a franchisee exit rate of over 25% in a single year. Such a high rate of churn is a critical red flag and may indicate significant systemic issues, such as franchisee unprofitability, dissatisfaction with the business model, or inadequate franchisor support.

Potential Mitigations

• It is imperative to contact a substantial number of former franchisees listed in Item 20 to understand their reasons for leaving the system; your attorney can help formulate questions.
• A business advisor should help you analyze the underlying causes of this high turnover rate before you proceed.
• Your accountant should use this turnover data as a key input when assessing the overall financial risk of this investment.

Explanation

While the Byrider brand has existed since 1989, the current franchisor is a new legal entity formed in August 2024 to acquire the assets of a financially distressed predecessor. Therefore, you are contracting with an unproven entity. Although the management team has prior experience with the system, the new company's ability to successfully operate and reverse the negative trends of the old system is not yet established, which presents a significant risk to new franchisees.

Potential Mitigations

• Your attorney must carefully review the asset purchase agreement details and understand what liabilities the new franchisor assumed from the predecessor.
• A business advisor should help you perform due diligence on the new ownership's track record and turnaround capabilities.
• Your accountant should assess the new entity's capitalization to determine if it is adequately funded to support a turnaround.

Explanation

The FDD discloses parent companies but does not include their financial statements. Given that the franchisor is a newly formed entity that acquired assets from a distressed predecessor, the financial strength of the parent entities is highly material to understanding the stability of the entire enterprise and its ability to provide support. The absence of this information creates a significant gap in the due diligence process and elevates financial risk.

Potential Mitigations

• Your attorney should advise on whether the parent company's financials are legally required under these circumstances and the implications of their absence.
• An accountant should analyze the franchisor's standalone financials with the understanding that they lack parent company backing in the disclosures.
• Inquire directly with the franchisor why parent financials are not provided and ask for any available financial assurances or guarantees.

Explanation

The franchisor is a new entity that acquired the assets of a predecessor, Byrider Franchising, LLC. The FDD package is replete with negative history related to this predecessor, including significant litigation with state attorneys general and franchisees (Item 3), extremely high franchisee turnover (Item 20), and financial statements confirming the predecessor was in “financial and operational hardships” (Exhibit A, Note 3). This history indicates deep-seated problems with the system you are buying into.

Potential Mitigations

• Your attorney must carefully review all litigation and the asset transfer details to understand what issues the new franchisor may have inherited.
• A business advisor should help you evaluate whether the new management has a credible plan to address the predecessor's historical problems.
• Speaking with long-term franchisees who operated under the predecessor is crucial for understanding this history.

Explanation

Item 3 discloses a significant history of litigation against the franchisor's predecessor. This includes actions brought by the Attorneys General of Ohio and Kentucky regarding consumer protection violations, as well as multiple arbitrations initiated by former franchisees alleging fraudulent inducement and breach of contract. This pattern of serious legal disputes suggests potential systemic issues with the franchisor's business practices, disclosure integrity, or franchisee relations, which may persist under the new ownership.

Potential Mitigations

• A franchise attorney must carefully analyze the nature, allegations, and outcomes of all litigation disclosed in Item 3.
• It is advisable to discuss the litigation history with your business advisor to assess its impact on the brand's reputation and operational risks.
• Inquiring with current franchisees about their awareness and perception of this litigation history is an important due diligence step.