Explanation

The franchisor's 2024 balance sheet shows zero cash. A footnote explains this is due to a cash pooling arrangement where all funds are swept to a parent company account. While member's equity is positive, At World Franchising, LLC (@properties) is entirely dependent on its parent for daily liquidity to fund its operations and support obligations. This structure creates a significant financial risk should the parent company face its own financial difficulties or choose not to fund @properties.

Potential Mitigations

• Your accountant should carefully analyze the consolidated financial health of the ultimate parent, Compass, Inc., not just the franchisor entity.
• It is critical for your attorney to review any parent guarantees of the franchisor’s obligations, assessing their strength and enforceability.
• Discussing the practical implications of this cash sweep arrangement with current franchisees would provide valuable insight.

Explanation

The data in Item 20 indicates a very small and shrinking franchise system. The number of franchised outlets decreased from five to three between the start of 2023 and the end of 2024. This includes terminations and two franchisees who ceased operations to convert to an affiliated brand. For such a small system, this level of churn is a significant indicator of potential franchisee dissatisfaction, a challenging business model, or issues with the brand's value proposition.

Potential Mitigations

• A business advisor can help you weigh the risks of joining a small, shrinking system versus a more established one.
• It is essential to contact the former franchisees listed in Exhibit F to understand their reasons for leaving the system.
• Your accountant should model a worst-case scenario where franchisor support diminishes due to the small system size.

Explanation

The franchisor only began offering franchises in August 2020 and, as Item 20 shows, has a very small and shrinking number of franchised outlets. This indicates the franchise model itself is relatively new and its success is not yet proven on a broad scale. Investing in an unproven system carries higher risks related to brand recognition, operational refinement, and the franchisor's ability to provide effective long-term support, as there is limited historical data on franchisee performance.

Potential Mitigations

• A thorough due diligence process, including speaking with all current and former franchisees, is critical to understand the realities of this new system.
• Your attorney should attempt to negotiate more favorable terms, such as lower fees or stronger performance guarantees, to offset the higher risk.
• Developing conservative financial projections with your accountant is essential, given the lack of a long-term performance track record.

Explanation

While not owned by a traditional private equity firm, the franchisor's ultimate parent was acquired by Compass, Inc., a large, publicly traded corporation, in January 2025. This creates similar risks, such as a focus on quarterly earnings and shareholder value that may not always align with your long-term profitability. Most significantly, as stated in Item 12, this relationship creates direct, high-level competition from thousands of Compass agents who can operate freely in your territory.

Potential Mitigations

• Your business advisor should help you research Compass's business practices and how they operate in markets with affiliated brands.
• It is crucial to have your attorney explain the full competitive implications of the franchisor being controlled by Compass.
• Discussing the on-the-ground impact of Compass's presence with current franchisees is essential for your due diligence.

Explanation

Item 3 discloses that the franchisor, its parent, or affiliates are defendants in six putative antitrust class-action lawsuits related to commission rules. While this is a widespread issue in the real estate industry, being named in this volume of significant litigation creates material uncertainty and risk. A negative outcome could impact industry practices and the franchisor's financial stability. The FDD also lists four other pending actions, contributing to a concerning legal landscape for the company.

Potential Mitigations

• A thorough discussion with your franchise attorney is required to understand the potential impact of this industry-wide litigation on the business model.
• Your accountant should consider the potential financial liabilities from this litigation when assessing the franchisor's long-term stability.
• Asking the franchisor about its strategies for navigating these legal challenges can provide insight into its management approach.