Explanation

The franchise turnover rates disclosed in Item 20 do not appear to be unusually high for a system of this size. The number of terminations, non-renewals, and other cessations over the past three years is relatively low. However, high turnover can be a major red flag in other franchise systems, as it may signal systemic problems, franchisee dissatisfaction, or lack of profitability. Constant vigilance of these numbers in future FDDs is important.

Potential Mitigations

• It is still advisable to contact a representative sample of current and former franchisees listed in Item 20 to discuss their experiences and reasons for leaving.
• Your business advisor can help you calculate the annual churn rate and compare it to available industry benchmarks for context.
• An attorney can help you ask targeted questions to the franchisor about any outlets that have ceased operations for any reason.

Explanation

This risk was not identified in the FDD package. Rapid system growth can be a concern if a franchisor's support infrastructure cannot keep pace, leading to inadequate assistance for franchisees. In this case, the data in Item 20 shows moderate and steady growth, not the explosive expansion that typically raises this concern. A manageable growth rate can be a sign of a healthy, sustainable system.

Potential Mitigations

• When evaluating any franchise, your business advisor should help you assess the franchisor's plans for scaling its support systems to match unit growth.
• It is a sound practice to ask existing franchisees about the quality and timeliness of the support they currently receive.
• An accountant's review of the franchisor's financials can help determine if they have the resources to support their stated growth plans.

Explanation

The franchisor has been in business since 2006 and has a reasonably sized system, so it is not a new or unproven franchise. An unproven system can carry higher risks, such as an untested business model, undeveloped support systems, or minimal brand recognition. It is generally beneficial that you are not investing in a brand new concept, as the operational model has been in use for a number of years.

Potential Mitigations

• Even with an established system, it is wise to have your business advisor help you conduct extensive due diligence on the brand's current market position.
• Speaking with a mix of new and long-term franchisees can provide insight into how the system has evolved over time.
• Your attorney can help you investigate the business and franchising experience of the current management team.

Explanation

This risk was not identified. The business model, dry cleaning and garment care, is a long-established industry with consistent consumer demand and is not based on a fleeting trend. A business based on a fad can be a significant risk, as consumer interest may disappear, leaving you with a worthless business and ongoing contractual obligations. The stability of the garment care industry is a positive factor for this franchise.

Potential Mitigations

• For any franchise investment, a business advisor can help you research the long-term market trends and sustainability of the industry.
• It's valuable to assess a franchisor's commitment to innovation and adaptation to stay relevant in a changing marketplace.
• Your financial advisor can assist in evaluating the resilience of any business model to economic shifts and downturns.

Explanation

This risk was not identified in the FDD. Item 2 indicates that the key executives have prior experience in the franchising industry and in the garment care business specifically. Inexperienced management can be a significant risk, potentially leading to poor strategic decisions and inadequate support for franchisees. The relevant experience detailed for the management team is a positive indicator for the system's operational guidance and strategic direction.

Potential Mitigations

• It is always a good practice to have your business advisor help you independently vet the backgrounds of the franchisor's key leadership team.
• Speaking with existing franchisees is a valuable way to get feedback on the competence and responsiveness of the current management.
• In any franchise context, ask your attorney about the stability of the management team and any recent turnover in key positions.

Explanation

This risk was not identified. The FDD does not indicate that the franchisor is owned by a private equity firm. When a PE firm owns a franchisor, there can be a risk that decisions are focused on short-term returns, which may not align with the long-term health of franchisees. The absence of PE ownership can sometimes suggest a longer-term focus on brand building and franchisee success.

Potential Mitigations

• When reviewing any franchise, your attorney can help you investigate the ownership structure to understand who makes ultimate decisions.
• If a franchisor is PE-owned, a business advisor can help you research the firm’s track record with its other franchise brands.
• It is wise to ask existing franchisees about any changes in system direction or support levels following an ownership change.

Explanation

The FDD discloses that ZIPS LLC is a subsidiary of Value Drycleaners of America, LLC (VDA), and VDA's audited financial statements are provided as required. There does not appear to be an issue of non-disclosure. However, the financials themselves present risks, which are addressed under the 'Disclosure of Franchisor's Financial Instability' risk. Proper disclosure of a parent entity and its financials is crucial for assessing the true backing of a franchise system.

Potential Mitigations

• Your accountant should always review the financials of any parent company, especially if it provides a guarantee for the franchisor's obligations.
• An attorney can help clarify the legal relationship between a franchisor and its parent to understand where ultimate responsibility lies.
• Ensuring all required financials are present and audited is a key due diligence step for your accountant to perform.

Explanation

The FDD states in Item 1 that ZIPS LLC has no predecessors, and the corporate history provided appears straightforward. In some franchise systems, a complex or negative history with predecessor companies can be obscured, hiding past failures or litigation. The lack of a disclosed predecessor simplifies due diligence in this area, which is a positive factor. A clear corporate history allows for a more direct assessment of the franchisor's track record.

Potential Mitigations

• It's good practice for your attorney to verify the corporate history disclosed in Item 1 and search for any undisclosed predecessors.
• When a predecessor exists, researching its history for litigation or bankruptcy is a critical task for your attorney.
• Speaking with long-term franchisees can often reveal important history about the system not detailed in the FDD.

Explanation

This risk was not identified in the FDD. Item 3 states that there is no litigation required to be disclosed. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, is a significant red flag that can indicate systemic problems. Likewise, a high volume of litigation initiated by the franchisor against its franchisees may suggest an overly aggressive or punitive operational culture. The absence of such disclosures is a positive sign.

Potential Mitigations

• Your attorney should still consider conducting an independent search for litigation involving the franchisor, as the disclosure requirements have specific thresholds.
• It is always prudent to ask current and former franchisees about their experiences with disputes and how the franchisor handles disagreements.
• Your attorney can help you understand the types of litigation that are most concerning when evaluating any franchise system.