Explanation

This risk was not identified in the FDD package. High franchisee turnover, evidenced by numerous terminations, non-renewals, or other cessations in Item 20, is a major red flag. It often signals systemic problems like unprofitability, poor franchisor support, or a flawed business model. A stable or growing system with low turnover is a much healthier sign for a prospective franchisee.

Potential Mitigations

• Your accountant can help you analyze the tables in Item 20 to calculate the actual turnover rate over the past three years.
• Contacting former franchisees listed in the FDD to discuss their reasons for leaving is a crucial due diligence step a business advisor can guide you through.
• It is wise to have your attorney review the FDD's definitions for transfer and termination to see if they could mask poor performance.

Explanation

This risk was not identified in the FDD package. The business model, focused on 'last mile' delivery services, is a component of the modern logistics industry and is not based on a short-term trend or fad. While competitive, the underlying consumer and business need for such services appears to be sustainable. A fad business carries the risk that demand will disappear, leaving you with a worthless investment.

Potential Mitigations

• A business advisor can help you research the long-term outlook for the specific industry niche to confirm its stability.
• Analyzing the franchisor's plans for innovation and adaptation with your financial advisor is a good practice for any business investment.
• Your attorney can review the franchise agreement's term length to ensure it aligns with a reasonable period to build a sustainable business.

Explanation

This risk was not identified in the FDD package. Item 2 indicates that the key executives have prior relevant experience in logistics, operations, and franchising (from the franchisee perspective). Inexperienced leadership can be a major liability, as it may lead to poor strategic decisions, weak operational systems, and inadequate franchisee support. This franchisor's management appears to have a pertinent background.

Potential Mitigations

• Your business advisor can help you independently verify the backgrounds and track records of the key executives listed in Item 2.
• Speaking with current franchisees about their perception of management's competence and the quality of support is a vital due diligence step.
• It is prudent to have your attorney review Item 2 for any concerning employment history or prior business failures of the management team.

Explanation

This risk was not identified in the FDD package. The franchisor is disclosed as being wholly owned by a corporation, not a private equity firm. PE ownership can sometimes introduce risks related to short-term profit motives, which may not align with the long-term health of franchisees. This includes potential cost-cutting in support services or pressure to use affiliated vendors.

Potential Mitigations

• A business advisor can help you research the ownership structure of any franchisor to identify potential influences from investment firms.
• Your attorney should review Item 1 and any related corporate documents to confirm the ownership structure.
• If PE ownership were present, speaking with franchisees who have operated under that ownership would be a key task for your business advisor.

Explanation

This risk was not identified in the FDD package. The franchisor states in Item 1 that it has no predecessors. A predecessor is a company from which the franchisor acquired the business concept. A history of predecessors can sometimes hide past problems, such as high failure rates or litigation, making it important to scrutinize any such disclosures with your professional advisors.

Potential Mitigations

• Your attorney should always verify the statements made in Item 1 regarding predecessors and corporate history.
• Independent online research on the company and its founders, assisted by a business advisor, can sometimes uncover prior business names or related entities.
• If predecessors were disclosed, speaking with long-term franchisees about their experience under previous ownership would be crucial.

Explanation

This risk was not identified in the FDD package. Item 3 discloses no material litigation history. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, is a significant red flag. It can indicate deep-seated problems in the franchise system's operations or its sales process. Conversely, numerous lawsuits filed by the franchisor against franchisees might suggest an overly aggressive or litigious culture.

Potential Mitigations

• Your attorney should confirm the disclosures in Item 3 by conducting independent legal searches for litigation involving the franchisor or its principals.
• A business advisor can help you search for online reviews and news articles that might mention franchisee disputes.
• Even with no litigation disclosed, it remains important to ask current and former franchisees about their relationship with the franchisor.