Explanation

The franchisor's audited financial statements reveal significant instability. PetSmart Veterinary Services, LLC (PVS) has a members' deficit (negative net worth) of over $5.4 million and sustained a net loss of over $7 million in the most recent fiscal year. The company is dependent on its parent for funding to continue operations. This financial weakness calls into question its ability to support you and the system long-term and is explicitly mentioned as a special risk.

Potential Mitigations

• An experienced franchise accountant must thoroughly review the franchisor's financial statements, including all notes and the auditor's report.
• Your business advisor should help you assess the stability of the parent company, PetSmart LLC, since PVS is entirely dependent on its financial support.
• Discuss the implications of the 'going concern' risk and the company's path to profitability with your financial advisor.

Explanation

Item 20 data reveals an extremely high rate of franchisee turnover. In the most recent fiscal year, 15 franchises were terminated and 1 ceased operations out of a starting base of 38, representing a turnover rate of over 40%. Additionally, Exhibit F shows 31 agreements were terminated where the hospital never even opened. This extraordinarily high number of exits is a critical red flag, suggesting potential systemic issues with the business model, profitability, or franchisor relationships.

Potential Mitigations

• You should contact a significant number of the former franchisees listed in Exhibit F to understand their reasons for leaving the system.
• Your franchise attorney should help you frame questions for these former franchisees to uncover potential systemic problems.
• Discuss the concerning turnover statistics directly with the franchisor and evaluate the credibility of their explanations with your business advisor.

Explanation

The franchise system is growing, with 15 new outlets opened in the last fiscal year. However, this growth is paired with extreme franchisee turnover (15 terminations) and significant franchisor financial losses, as noted in Item 21. This combination suggests that PVS may be focused on selling franchises to generate fees while struggling with unit-level stability and its own financial health, potentially straining its ability to provide adequate support to all locations.

Potential Mitigations

• With your business advisor, you should question the franchisor about their capacity and plans for scaling support infrastructure to match unit growth.
• Interviewing a broad range of existing franchisees about the current quality and responsiveness of franchisor support is essential.
• Your accountant should review the franchisor's financials in Item 21 to assess if they have the resources to support both new and existing units.

Explanation

PVS is a new franchise system, having been formed in March 2022 and only starting to franchise thereafter. The extremely high franchisee turnover rate disclosed in Item 20, coupled with significant financial losses in Item 21, indicates the business model and support systems may be unproven and unstable. The franchisor explicitly flags its limited operating history as a special risk for you to consider, which elevates the investment risk compared to more established systems.

Potential Mitigations

• Conduct extensive due diligence on the backgrounds of the management team in both the veterinary industry and franchising with your business advisor.
• Speaking with the earliest franchisees from the Item 20 list about their experiences is critical to understanding the system's evolution and challenges.
• Your attorney can help you assess the additional risks associated with investing in a young and seemingly turbulent franchise system.

Explanation

The franchisor, PVS, is a subsidiary of PetSmart LLC. The franchisor's own financial statements are provided and show it is not financially independent, relying on its parent for funding. While the parent is disclosed, its financial statements are not included in the FDD. The lack of parent financials means you cannot independently verify the stability and capacity of the entity that is keeping the insolvent franchisor afloat, which represents a significant information gap and risk.

Potential Mitigations

• Your accountant must review the franchisor's financials, paying close attention to the nature and terms of the parent company support mentioned in the notes.
• Given the franchisor's insolvency, a discussion with your attorney is needed to understand the legal risks if the parent company were to withdraw its support.
• Ask the franchisor if they can provide the parent company's financial statements to allow for a more complete risk assessment by your accountant.