Explanation

The franchise system is growing in terms of unit count despite its significant, multi-year financial losses. While growth can be positive, expanding without a stable financial foundation can strain the franchisor's limited resources. This may compromise their ability to provide the training, support, and other services promised to new and existing franchisees, potentially jeopardizing the health of the entire system.

Potential Mitigations

• Inquire with the franchisor about how they plan to fund and scale their support infrastructure to match growth, given their financial state.
• Discuss with current franchisees whether they have noticed any decline in the quality or responsiveness of franchisor support as the system has grown.
• A business advisor can help you assess whether the franchisor's growth plans are realistic and sustainable.

Explanation

This risk was not identified in the FDD package. The franchise operates in the business-to-business logistics, freight, and industrial packaging sector. This is a fundamental component of the commercial economy rather than a business model based on a fleeting consumer trend or fad.

Potential Mitigations

• A business advisor can help you research the long-term stability and economic outlook for the specific industry in which the franchise operates.
• Before investing in any franchise, it is wise to assess the durability of customer demand for its products or services with your financial advisor.
• When evaluating a business, your attorney can help you review the franchise agreement for term length to ensure it aligns with a sustainable business model.

Explanation

This risk was not identified in the FDD package. Item 2 indicates that the key personnel have significant experience in the logistics and packaging industry, with some having been with the company since 2002. Several executives also have prior experience in franchise development and sales with other companies.

Potential Mitigations

• It is always a good practice to research the professional backgrounds of the franchisor's key management team using online resources.
• Speaking with current franchisees can provide valuable insight into the competence and effectiveness of the management team.
• A business advisor can help you evaluate whether the management team's skills and experience align with the support needs of franchisees.

Explanation

This risk was not identified in the FDD package. According to Item 1, the franchisor is owned by SUPPLY POINTe Holdings, LLC. There is no information to suggest that the franchisor or its parent company is owned or controlled by a private equity firm.

Potential Mitigations

• Your attorney can help you investigate the ownership structure of the franchisor and its parent company to confirm the identity of the ultimate beneficial owners.
• A business advisor can explain the potential impacts, both positive and negative, that private equity ownership can have on a franchise system.
• If ownership is ever unclear, asking the franchisor for an organizational chart can be a useful step in due diligence.

Explanation

Item 1 discloses the existence of a parent company, SUPPLY POINTe Holdings, LLC. However, the FDD does not include the parent company's financial statements. Given the franchisor's significant financial weakness, the financial health of the parent is a material factor in assessing whether it can support the franchisor, yet that information is not available for review.

Potential Mitigations

• Your accountant should evaluate the franchisor's financials on a standalone basis, noting the significant risk presented by their insolvency.
• Ask your attorney to inquire if the parent company provides any financial guarantee for the franchisor's obligations and to request the parent's financials.
• You should discuss with your business advisor the risks of an undercapitalized franchisor that may lack a financially strong parent for support.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD explicitly states, "We do not have any predecessors."

Potential Mitigations

• Your attorney should always confirm statements made in the FDD, including the lack of a predecessor, through independent verification where possible.
• When a franchisor does have a predecessor, it is crucial to have your accountant and attorney review the predecessor's history regarding litigation, bankruptcy, and franchisee turnover.
• A business advisor can help you understand how a change in ownership from a predecessor can impact a franchise system's culture and support.

Explanation

This risk was not identified in the FDD package. Item 3 states that there is no litigation that is required to be disclosed.

Potential Mitigations

• Although no litigation is disclosed, it is still a valuable use of time to conduct online searches for any news articles or legal actions involving the franchisor.
• Your attorney can discuss the types of litigation that are common in franchising and what their disclosure in Item 3 would signify.
• Asking current and former franchisees about their experiences and if they are aware of any disputes within the system can provide valuable context.