Explanation

Item 20 data from 2023 and 2024 shows a consistent pattern of franchisee exits. In 2023, seven franchises exited (4 terminations, 3 ceased operations) from a base of 96, a churn rate of over 7%. In 2024, five franchises exited (2 non-renewals, 3 ceased operations). While not catastrophic, this steady rate of turnover could suggest underlying issues with the business model, profitability, or franchisee satisfaction that warrant further investigation.

Potential Mitigations

• It is crucial to contact a broad range of former franchisees listed in Exhibit G to understand their reasons for leaving the system.
• Your accountant should help you analyze the churn rate trends over the three years provided and compare them to any available industry benchmarks.
• A business advisor can help you assess if this turnover rate presents an acceptable level of risk for your investment.

Explanation

Item 20 data shows the system grew from 61 total outlets at the start of 2022 to 101 by the end of 2024. This rapid expansion, combined with the franchisor's acknowledged weak financial position (negative net worth), presents a risk that its support infrastructure may not have kept pace with growth. This could potentially strain resources for providing adequate training, operational support, and quality control to all franchisees.

Potential Mitigations

• In discussions with the franchisor, inquire specifically about how they have scaled their support staff and systems to manage this growth.
• Contacting franchisees who joined at different times (early vs. recent) can provide insight into whether support quality has changed over time.
• A business advisor can help you assess if the current support structure seems adequate for a system of this size.

Explanation

The franchisor began offering franchises in October 2018. While not a brand-new startup, the system is still relatively young and is operating with a significant negative net worth, as disclosed in Item 21. A prospective franchisee should consider the risks associated with a younger system that is still establishing its long-term market position and financial stability, which may impact brand recognition and support capabilities.

Potential Mitigations

• Speaking with some of the earliest-joining franchisees listed in Item 20 can provide valuable perspective on the system's evolution and challenges.
• A thorough review of the management team's prior industry and franchising experience with a business advisor is critical.
• Your accountant should carefully analyze the financial statements to assess the company's path toward financial stability.

Explanation

The President of Franchise Operations has been in that specific role since April 2022, and was previously the Director of Franchise Operations from March 2021. Prior to that, her experience was as a store manager for Starbucks. While she has several years of experience with the franchisor, her executive-level franchising experience is relatively recent. This could present a risk regarding the depth of seasoned franchise leadership guiding the system's operations and strategy.

Potential Mitigations

• A careful review of the entire management team's collective experience in both real estate and franchising is important for a complete picture.
• When speaking with current franchisees, asking about their direct experiences with the operations team's support and guidance is recommended.
• Your business advisor can help you assess if the management team's overall skillset aligns with the support needs of the franchise.

Explanation

Item 3 discloses that during the last fiscal year, the franchisor initiated two lawsuits against franchisees. These suits were to collect past-due payments and, in one case, to enforce a non-compete covenant. While these were not franchisee-initiated lawsuits alleging fraud, they do indicate a willingness by the franchisor to litigate against its franchisees to enforce its agreements. This could be a consideration in how disputes are handled within the system.

Potential Mitigations

• Your attorney should review the nature of the litigation disclosed in Item 3 to understand the context.
• When speaking with current franchisees, it would be prudent to inquire about the franchisor's general approach to resolving disputes and enforcing agreements.
• Maintaining open communication and meticulous compliance with the franchise agreement can help avoid such disputes.