Explanation

The 2024 audited financial statements for HPB Lighting LLC (HPB Lighting) show significant financial distress. The company has a Member's Deficit (negative net worth) of over $2.2 million and incurred a net loss of over $2.8 million. Current liabilities far exceed current assets. The FDD's own 'Special Risks' section warns of this, and the financials note a reliance on the parent company for funding, indicating an inability to operate on its own cash flow and support franchisees effectively.

Potential Mitigations

• Your accountant must conduct a thorough review of the financial statements, including all notes, to assess the franchisor's viability.
• Discuss the parent company's commitment to fund operations and its own financial strength with your attorney.
• A business advisor can help you evaluate the risk of the franchisor failing to provide promised support due to its financial condition.

Explanation

Item 20 data reveals an exceptionally high franchisee turnover rate. In 2024, the system began with 107 franchised outlets and recorded 45 terminations during the year. This represents a termination rate of approximately 42%, a critical red flag suggesting potentially systemic issues with the business model, franchisee profitability, or franchisor support. The franchisor's 'Special Risks' section explicitly warns about the turnover rate, confirming the severity of this issue.

Potential Mitigations

• It is critical to contact a significant number of former franchisees from the list in Item 20 to understand why they left the system.
• A business advisor should help you analyze the turnover data over the past three years to evaluate the system's stability.
• Your attorney should discuss the potential causes and implications of such a high failure rate.

Explanation

The franchise system experienced explosive growth, going from 4 outlets to 111 in 2022. This was followed by extremely high turnover, with 45 terminations in 2024. This pattern, combined with the franchisor's significant financial losses, suggests growth may have outpaced the ability to provide adequate franchisee support, potentially contributing to the high failure rate. This indicates a significant risk that the support systems are not mature or stable enough for the number of franchisees.

Potential Mitigations

• Question the franchisor directly about how they have scaled their support infrastructure to handle the number of units.
• With your business advisor, assess whether the franchisor's current support staff levels seem adequate for the system size.
• Speaking with franchisees who have been in the system for more than a year can provide insight into the evolution of support quality.

Explanation

HPB Lighting began franchising in late 2021, and the FDD explicitly highlights its 'Short Operating History' as a 'Special Risk.' This lack of a long-term track record, combined with the extremely high franchisee turnover and financial instability, indicates a very high-risk investment. An unproven system lacks validated processes and a stable operational history, increasing the potential for business failure.

Potential Mitigations

• Your business advisor should help you perform extensive due diligence on the viability of the business model itself, independent of the franchise.
• A franchise attorney can help you understand the heightened risks associated with investing in a new and financially unstable system.
• Given the high risk, exploring more established franchise systems in the same industry is a prudent step to consider.

Explanation

While HPB Lighting is not a direct defendant, Item 3 discloses two pending lawsuits against its affiliates under the same parent umbrella (Horsepower Brands) and management. The allegations are serious, including fraudulent misrepresentation and fraud in the inducement. A pattern of such claims within the larger franchise organization represents a significant risk, suggesting potential issues with sales practices or disclosure integrity across the brands managed by the same parent.

Potential Mitigations

• Your attorney must review the details of the affiliate litigation disclosed in Item 3 to understand the nature of the claims.
• This pattern of allegations should be a major topic of discussion with your legal and business advisors.
• Contacting franchisees from the affiliated brands involved in the litigation could provide invaluable insight.