Explanation

This specific risk was not identified in the FDD. Item 20 data shows no franchisee terminations, non-renewals, or other cessations over the last three years. However, with only one franchisee in the system, this data is not statistically significant. High franchisee turnover is generally a critical warning sign of systemic problems, such as unprofitability or poor franchisor support, so this area requires ongoing monitoring as the system grows.

Potential Mitigations

• Your business advisor should help you analyze Item 20 data for any future franchise investment to calculate the effective turnover rate.
• It is always prudent to have your attorney help formulate questions for former franchisees to understand their reasons for leaving a system.
• An accountant can compare a system's turnover rate against available industry benchmarks to assess its relative stability.

Explanation

This risk was not identified in the FDD. Item 20 tables show the system has been static at one franchised and one company-owned unit for three years, indicating no growth. While not rapid growth, this stagnation presents its own risks related to brand recognition and system development. Rapid expansion can strain a franchisor's ability to provide adequate training and support, which is a key consideration when evaluating more mature systems.

Potential Mitigations

• For any franchise, asking existing franchisees about the quality and timeliness of franchisor support is a crucial due diligence step.
• Your accountant can review a franchisor's financial statements to determine if they have the capital and cash flow to support their existing or planned growth.
• A business advisor can help you question the franchisor about their infrastructure and staffing plans for supporting new and existing units.

Explanation

The business model of engine fluid delivery services is established, so it does not appear to be a fad. However, investing in any franchise requires assessing its long-term market relevance. A business concept tied to a temporary trend can be risky, as franchisee obligations under the contract continue even if consumer interest declines, potentially threatening the viability of your business.

Potential Mitigations

• A business advisor can help you research the long-term market demand and competitive landscape for the specific products and services offered.
• It is wise to evaluate a franchisor’s commitment to innovation and adaptation to stay ahead of market changes.
• Your financial advisor can assist in assessing the business model's resilience to economic shifts and evolving consumer behavior.

Explanation

This specific risk was not identified in the FDD. Item 1 does not indicate that the franchisor is owned by a private equity firm. When this ownership structure exists, it can introduce risks related to priorities, as the firm may focus more on short-term investor returns rather than the long-term health of the franchise system. This can sometimes lead to increased fees, reduced support, or a quick sale of the brand.

Potential Mitigations

• If considering a PE-owned franchise, your business advisor can help research the firm’s reputation and track record with other franchise brands.
• Asking franchisees of a PE-owned system about any changes in culture, support, or costs since the acquisition is a key due diligence step.
• Your attorney can review the franchise agreement for any terms that might change upon a sale of the franchise system.

Explanation

This specific risk was not identified in the FDD. Item 1 does not disclose any predecessors. When a franchisor has a predecessor, it is important to scrutinize that history. A franchisee might not get a complete picture of the system's past challenges if the FDD downplays or omits negative information about the predecessor, such as past litigation, bankruptcy, or high franchisee failure rates.

Potential Mitigations

• Your attorney should always carefully review Item 1 of an FDD to identify any disclosed predecessors.
• A business advisor can help you conduct independent research on a predecessor's history if one is identified.
• In a system with a predecessor, it's beneficial to ask long-term franchisees about their experience under the prior ownership.

Explanation

This specific risk was not identified in the FDD. Item 3 states that there is no material litigation to disclose against the franchisor. A pattern of litigation, particularly franchisee-initiated lawsuits alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may indicate systemic problems within the franchise relationship, its sales practices, or its business model.

Potential Mitigations

• It is always a wise practice for your attorney to review the litigation history in Item 3 of any FDD.
• Even if no litigation is disclosed, your business advisor can help you conduct online searches for news or franchisee complaints about the brand.
• You should discuss any disclosed litigation with current and former franchisees to understand the context from their perspective.