Explanation

This risk was not identified in the FDD package. The franchisor's audited financial statements appear stable, showing consistent profitability and a strong balance sheet. Financial instability can jeopardize a franchisor's ability to provide support or even remain in business, making a thorough review of Item 21 crucial for any prospective franchisee.

Potential Mitigations

• Engaging an accountant to perform a multi-year analysis of a franchisor's financial statements is a critical due diligence step.
• A comprehensive review of all footnotes in the financial statements with your accountant can reveal important details about financial health.
• Your business advisor can help assess whether the franchisor's financial model appears sustainable for the long term.

Explanation

This risk was not identified in the FDD package. The data in Item 20 shows very low franchisee turnover, with only two terminations and no non-renewals or other cessations over the last three years across a large system. High turnover is a significant red flag that can indicate systemic problems, so its absence here is a positive indicator.

Potential Mitigations

• It is always a valuable exercise to contact a sample of current and former franchisees from the lists in Item 20 to discuss their experiences.
• An analysis of the Item 20 tables with your accountant can help you calculate the true turnover rate for any franchise system.
• Your attorney can help you formulate key questions to ask former franchisees about their reasons for leaving the system.

Explanation

This risk was not identified in the FDD package. The growth of the franchise system, as detailed in Item 20, appears steady and controlled rather than excessively rapid. A manageable growth rate suggests the franchisor may be better equipped to provide consistent support to its franchisees.

Potential Mitigations

• Asking a franchisor about their specific plans for scaling support staff and infrastructure to match future growth is a prudent step.
• Discussions with franchisees who have joined at different times can provide insight into the consistency of franchisor support.
• A business advisor can help you assess whether a franchisor's growth seems sustainable or potentially problematic.

Explanation

This risk was not identified in the FDD package. The franchisor has been in business since 1999 and franchising since 2002, with approximately 200 total outlets. This indicates a mature and well-established system, not a new or unproven one.

Potential Mitigations

• For any franchise, especially newer ones, a thorough investigation of the system's history and the founders' experience is essential.
• A business advisor can help evaluate the track record and stability of a franchise system.
• Speaking with the earliest franchisees in a system provides valuable perspective on its evolution and the franchisor's performance over time.

Explanation

This risk was not identified in the FDD package. The business of selling and renting automotive tires and wheels is a long-standing industry with consistent consumer demand. It does not appear to be based on a short-term trend or fad.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term consumer demand for any franchise's products or services.
• Evaluating a business concept's resilience to economic shifts and changing trends is a critical part of due diligence.
• Asking a franchisor about its research and development plans can provide insight into its strategy for long-term relevance.

Explanation

This risk was not identified in the FDD package. The management team detailed in Item 2 possesses extensive and long-term experience with the brand and in the industry. The Founder and key executives have been with the company for over two decades, which indicates a stable and experienced leadership team.

Potential Mitigations

• A thorough review of the executive team's background in Item 2 is critical to assess their experience in both the specific industry and in franchising.
• Your business advisor can assist in researching the reputation and track record of a franchisor's management team.
• Posing questions to current franchisees about their direct experiences with the leadership team can provide valuable, real-world insights.

Explanation

This risk was not identified in the FDD package. Item 1 and the overall FDD do not indicate that the franchisor is owned or controlled by a private equity firm. Ownership appears to be stable and held by its founders.

Potential Mitigations

• It's important to have your attorney determine the ultimate ownership structure of the franchisor, including any private equity involvement.
• If a franchisor is PE-owned, researching the firm's history with other franchise brands is a crucial step.
• A business advisor can help you understand the potential impacts of a private equity ownership model on a franchise system.

Explanation

This risk was not identified in the FDD package. Item 1 clearly states the franchisor has no parent company and provides details on its nine affiliate companies, eight of which operate stores. The financial statements provided are for the consolidated entity, offering a transparent view.

Potential Mitigations

• Your attorney should verify the corporate structure disclosed in Item 1 to ensure all relevant parent and affiliate entities are identified.
• If a parent company's guarantee is crucial to the franchisor's viability, an accountant should review the parent's financial statements.
• Understanding the relationships and dependencies between the franchisor and its affiliates is a key part of risk assessment.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD clearly states that the franchisor has no predecessors, meaning it has not acquired the system from a prior entity. This avoids the risk of inheriting undisclosed historical problems.

Potential Mitigations

• For any franchise, it is important to have your attorney review Item 1 for any disclosed predecessors.
• If a predecessor exists, researching their history for litigation, bankruptcy, or high franchisee turnover can reveal inherited risks.
• Your business advisor can help you investigate the history of a brand, especially if it has changed hands.

Explanation

This risk was not identified in the FDD package. Item 3 states that there is no litigation that requires disclosure. A clean litigation history is a positive sign, as a pattern of lawsuits, especially from franchisees, can indicate systemic problems.

Potential Mitigations

• Even with a clean Item 3, it is wise to have your attorney conduct an independent search for litigation involving the franchisor.
• You should always ask current and former franchisees about any formal or informal disputes they have had with the franchisor.
• Understanding the types of litigation common in a specific industry can provide context for any disclosed legal actions.