Explanation

The financial statements for the guarantor, TCB Services HoldCo, LLC (HoldCo), show significant and recurring net losses for both 2023 and 2024. While HoldCo appears solvent, continued losses could impact its ability to provide financial backing and support to the franchisor, TCB FURNITURE MEDIC, LLC (FM). This may affect FM's capacity to invest in the system, support franchisees, and fulfill its obligations, potentially increasing your risk as a franchisee.

Potential Mitigations

• A franchise accountant should thoroughly analyze the guarantor's financial statements, including footnotes and cash flow, to assess its long-term viability.
• Discuss the reasons for the operating losses and the strategies to achieve profitability with the franchisor's management, with guidance from your business advisor.
• Your attorney can help you understand the strength and any limitations of the performance guarantee provided by the guarantor.

Explanation

The FDD explicitly flags a high turnover rate as a special risk. Over the last three years (2022-2024), the system has shrunk from 212 to 107 outlets, a 50.5% decrease. In the last year alone, 19 franchises were terminated or not renewed out of a starting base of 127. Such a high rate of attrition is a critical indicator of potential systemic problems, which could include franchisee unprofitability, dissatisfaction with support, or other fundamental business model issues.

Potential Mitigations

• It is imperative to contact a significant number of former franchisees listed in FDD Exhibit E to understand why they left the system.
• A thorough discussion with your business advisor is necessary to weigh the severe risk indicated by this high turnover against any potential opportunities.
• Your accountant should use this turnover data to create highly conservative financial projections.

Explanation

The franchisor, TCB Furniture Medic, LLC, is a recently formed entity (March 2023), as is its guarantor, TCB Services HoldCo, LLC. While the Furniture Medic brand has a long history under predecessors, the current ownership and management structure is new. This newness, combined with the guarantor's operating losses, presents a risk, as the management team's ability to successfully operate this specific system and provide consistent, effective support over the long term is not yet proven.

Potential Mitigations

• Engaging a business advisor to vet the new management team's specific experience in both this industry and in managing a franchise system is crucial.
• It is important to ask current franchisees about their experience with the new management team's support and strategic direction.
• An attorney should review the assignment of rights from the predecessor to understand what obligations the new franchisor has assumed.

Explanation

The franchisor is indirectly owned by TCB Services HoldCo, LLC, an affiliate of Eagle Merchant Partners, which is a private equity firm. Private equity ownership can introduce a focus on short-term financial returns over the long-term health of the brand and franchisee profitability. Decisions regarding fees, support levels, and potential sale of the system may be driven by the investment firm's exit strategy, creating uncertainty for your long-term investment.

Potential Mitigations

• Researching the private equity firm's history with other franchise brands can offer insight into their typical operating style; a business advisor can assist.
• Your attorney should carefully analyze the franchisor's rights to assign the franchise agreement in the event of a future sale.
• Discuss any changes in system culture or support with franchisees who have been with the brand both before and after the acquisition.

Explanation

The franchisor acquired the system from predecessors in March 2023. While the FDD discloses the immediate and indirect predecessors, it's important to recognize that the extremely high franchisee turnover and system shrinkage reported in Item 20 occurred under this prior ownership. This history suggests there may be significant inherited challenges, franchisee dissatisfaction, or business model issues that the new ownership must address.

Potential Mitigations

• Your business advisor should help you question the current franchisor about the problems that led to the high turnover under the predecessor.
• It is critical to ask long-term franchisees about their experiences under both the old and new ownership.
• An attorney can help you understand the transition and what specific liabilities or obligations were assumed from the predecessor.