Explanation

The franchisor’s own audited financials explicitly disclose conditions that “raise substantial doubt about Loyalty Business Services, LLC’s (LBS) ability to continue as a going concern.” The company has a history of significant annual net losses and negative working capital. The 'Special Risks' section also highlights this financial condition. This calls into question LBS's ability to support you and remain solvent, posing a significant risk to your investment.

Potential Mitigations

• Your accountant must review the 'Going Concern' note and the underlying financial statements to assess the severity of the financial risk.
• A thorough discussion with your financial advisor is necessary to evaluate if the potential rewards of this franchise justify the risk of franchisor insolvency.
• In discussions with the franchisor, it's wise to have your business advisor help you inquire about the specific, tangible steps being taken to remedy these financial issues.

Explanation

The FDD discloses an extremely high turnover rate. In the 'Special Risks' section, LBS states that, “During the last year, approximately 50% of franchised outlets were terminated.” Item 20 data confirms the system went from two franchisees to one in 2023. This alarming rate of franchisee failure is a critical red flag, suggesting potential systemic problems with the business model, its profitability, or the franchisor's support system.

Potential Mitigations

• It is imperative to contact the former franchisee listed in Item 20 to understand why they left the system.
• Discussing the specific reasons for this high turnover rate with the franchisor, with guidance from your franchise attorney, is essential.
• Your accountant should help you model the potential financial impact on your business if the underlying issues causing this turnover persist.

Explanation

LBS is a new franchisor, having started offering franchises in June 2020 with a very small system (currently one franchisee). LBS itself has never operated an Area Representative business. The 'Special Risks' section explicitly warns of the 'Short Operating History.' Investing in such an unproven system carries a higher risk of business model flaws, inadequate support, and potential failure compared to a mature, established brand.

Potential Mitigations

• Intensive due diligence is required; engaging a business advisor to scrutinize the business model and support systems is critical.
• Your franchise attorney should seek to negotiate more favorable terms, such as enhanced protections or lower fees, to compensate for the higher risk.
• Your accountant should help you build financial models with very conservative assumptions due to the lack of a proven performance track record.

Explanation

The business experience of key leadership appears limited in the specific industry and in franchising. The President, in his role since December 2024, has a background in pipefitting and real estate, not accounting or franchise management. The Interim CEO role has changed hands multiple times. This lack of deep, relevant executive experience could lead to strategic errors, weak operational guidance, and inadequate support for you as an Area Representative.

Potential Mitigations

• Engaging a business advisor to help you question the franchisor about their strategies to compensate for management's experience gaps is crucial.
• It's vital to speak with the current franchisee about the quality and effectiveness of the guidance they receive from the management team.
• Your attorney can advise on the implications of leadership instability and inexperience on the franchisor's ability to fulfill its contractual obligations.

Explanation

Item 3 discloses an extensive history of litigation involving John T. Hewitt, the CEO of the parent company, from his time leading a previous tax franchise. The lawsuits included serious allegations such as breach of fiduciary duty, tortious interference with franchise agreements, and creating an inappropriate corporate culture. While not against LBS directly, this history reflects on the character and past business practices of the ultimate leader of your franchise system.

Potential Mitigations

• A thorough review of the details and outcomes of all disclosed litigation with your franchise attorney is essential.
• Discussing the potential reputational risk to the entire 'Loyalty Brands' ecosystem with a business advisor is a prudent step.
• You should consider this history carefully when evaluating the leadership and culture of the organization you are joining.