Explanation

Amazing Lash Franchise, LLC (Amazing Lash) explicitly flags its financial condition as a special risk on page 5. Furthermore, Item 21 does not provide financial statements for Amazing Lash itself, but for an affiliate, Elements Therapeutic Massage, LLC (ETM), which acts as a guarantor. This structure suggests Amazing Lash may not be financially self-sufficient, requiring you to rely on the health of a separate entity. This poses a risk to the long-term support you may receive.

Potential Mitigations

• A franchise accountant should meticulously review the guarantor's audited financial statements, including all footnotes, to assess its ability to support Amazing Lash.
• Discuss the implications of a guaranteed system and the financial health of both the franchisor and guarantor with your attorney.
• It is wise to ask the franchisor why its own financial statements are not provided and to understand the strength of the parent company with your business advisor.

Explanation

Item 20 data reveals a significant level of franchisee turnover. In 2024, the system experienced a net decrease of 61 units, with 70 terminations from a starting base of 262. This represents a termination rate of over 26% in a single year, which is alarmingly high and could indicate systemic issues such as franchisee unprofitability, dissatisfaction with the system or support, or overly aggressive contract enforcement by the franchisor.

Potential Mitigations

• Your attorney should help you formulate questions for current and former franchisees about their experiences and reasons for leaving the system.
• Engage an accountant to analyze the turnover rates over the last three years and compare them against any available industry benchmarks.
• A business advisor can help you assess if the high turnover presents an unacceptable risk to your potential investment.

Explanation

The franchise system is not experiencing rapid growth; instead, it is shrinking. Item 20 data shows a net loss of 61 franchised units in 2024 and 14 in 2023. While rapid growth has its own risks, a contracting system can also be a significant concern, potentially indicating declining brand relevance, market saturation, or widespread franchisee failure. This trend may impact brand value, peer support, and the franchisor's ability to fund system-wide initiatives.

Potential Mitigations

• It is critical to discuss the reasons for system contraction with the franchisor and a wide range of current franchisees.
• Your business advisor can help you analyze the market and competitive landscape to determine if the shrinkage is a temporary correction or a long-term decline.
• Have your accountant carefully review the franchisor's financial stability in light of a shrinking royalty base.

Explanation

Item 1 discloses that the franchisor's ultimate parents are KSL Capital Partners funds, a private equity firm. This ownership structure can present risks. Private equity firms typically have a defined investment horizon and may prioritize maximizing short-term returns for their investors, which could potentially lead to decisions that are not aligned with the long-term health of franchisees, such as increasing fees, cutting support costs, or preparing the system for a future sale.

Potential Mitigations

• Investigate the private equity firm's reputation and track record with other franchise systems they have owned with a business advisor's help.
• Discuss with current franchisees whether they have observed any changes in franchisor behavior or support since the acquisition.
• Your attorney should review any clauses related to the sale or assignment of the franchise system to understand your rights in such an event.

Explanation

Item 3 discloses a significant and extensive history of litigation and arbitration involving the franchisor, its predecessor, and franchisees. Multiple cases involve claims of breach of contract, fraud, and disputes over key operational aspects like the required supplier (WAVE) and client data. This pattern suggests a potentially litigious relationship between the franchisor and its franchisees, which could be a major risk and an indication of underlying systemic problems or dissatisfaction within the franchise network.

Potential Mitigations

• Your franchise attorney must conduct a detailed analysis of the litigation history in Item 3, noting the nature, frequency, and outcomes of the cases.
• Speaking with a significant number of current and former franchisees is critical to gain perspective on the franchisor-franchisee relationship.
• You should consider the potential costs and stress of future disputes when evaluating this investment with your advisors.