Explanation

The franchisor's ultimate parent and guarantor, Steele Pomp Investment, LLC, has a history of significant net losses, totaling over $13 million in 2022 and 2023, with a large accumulated deficit. Although it reported a profit in 2024, this history could indicate potential financial pressures that might affect its ability to support the franchise system. A financially strained franchisor may cut back on essential services like marketing and operational support.

Potential Mitigations

• Your accountant should thoroughly analyze the guarantor's financial statements, including the recent shift to profitability and the large accumulated deficit.
• A business advisor can help you assess if the franchisor's current resources are sufficient to support its growth and obligations.
• Discuss the financial stability and long-term commitment of the parent company with your attorney.

Explanation

The data in Item 20 shows a consistent pattern of franchisee terminations over the last three years, with 13 shops terminated in both 2023 and 2024. This represents a turnover rate of over 8% from terminations alone in each of those years. This could be an indicator of potential issues within the system, such as franchisee unprofitability, dissatisfaction, or disputes with the franchisor, which presents a significant risk to your investment.

Potential Mitigations

• It is critical to contact a significant number of former franchisees from the list in Exhibit D2 to understand their reasons for leaving the system.
• Your attorney can help you frame questions for these former franchisees to uncover any potential systemic problems.
• Discussing the high termination rate directly with the franchisor may provide additional context for your business advisor to consider.

Explanation

The franchisor is planning for significant growth, projecting 42 new franchised outlets in the next fiscal year after adding 30 in 2024. When combined with the parent company's history of financial losses, this rapid expansion could potentially strain its ability to provide adequate site selection support, training, and ongoing operational guidance to all franchisees. You may find that support resources are stretched thin, affecting your business's ramp-up and ongoing performance.

Potential Mitigations

• In discussions with current franchisees, specifically ask about the quality and responsiveness of the franchisor's support systems.
• A thorough review of the franchisor's plans for scaling its support staff and infrastructure should be conducted with your business advisor.
• Your attorney can help you inquire about the franchisor's specific strategies to manage this projected growth without diminishing franchisee support.

Explanation

As disclosed in Item 1, the franchisor is ultimately owned by private equity firm KSL Capital Partners. This ownership structure may prioritize short-term returns for investors over the long-term health of franchisees. This could manifest as pressure to reduce support costs, increase fees, or prepare the system for a future sale. The Franchise Agreement also gives the franchisor the right to sell the system without your consent, potentially to a new owner with different priorities.

Potential Mitigations

• It is advisable to research the private equity firm's reputation and track record with other franchise systems they have owned.
• Your attorney should review the assignment clause in the Franchise Agreement to clarify your rights if the system is sold.
• When speaking with franchisees, ask about any changes in culture, support, or costs since the private equity acquisition.

Explanation

The FDD discloses significant litigation involving the franchisor’s parent and affiliate companies. A group of franchisees from an affiliated brand, Radiant Waxing, has sued the parent company, Steele Pomp LLC, alleging breach of contract and other claims. While not directly against the Drybar franchisor, this litigation within the same parent organization could indicate a corporate culture or operational practices that may lead to franchisee disputes and legal conflicts, posing a risk to your relationship.

Potential Mitigations

• Your attorney must carefully review the details of the disclosed litigation in Item 3 and can perform additional research on the case.
• This litigation should be a key topic of discussion when you speak with current and former Drybar franchisees.
• A frank discussion with the franchisor about this litigation and how they are managing franchisee relationships across their brands is warranted.