Explanation

BurgerFi Franchise, LLC (BFL) is a new company formed in December 2024 with an audited opening balance sheet showing only $100 in cash. Its predecessor filed for Chapter 11 bankruptcy in September 2024. The Maryland state addendum requires BFL to defer collecting your initial fees due to its financial condition. This indicates a significant risk that BFL may lack the capital to support the system or its franchisees, relying heavily on new franchise sales for operating funds.

Potential Mitigations

• Your accountant must thoroughly review the franchisor's financial statements, including all footnotes and the predecessor's bankruptcy filing.
• Understanding the implications of the Maryland financial assurance requirement with your attorney is critical, as it signals regulator concern.
• A business advisor can help you assess whether the franchisor has sufficient capital to fulfill its support obligations without relying on your fees.

Explanation

Item 20 data reveals a significant and consistent decline in the number of franchised outlets over the last three years, from 94 to 66. In 2024 alone, there was a net loss of 12 franchised units, with 20 terminations on a starting base of 78 units. This extremely high rate of franchisee failure and exit (over 25% turnover in one year) is a critical red flag, suggesting potential systemic problems with profitability, support, or the business model.

Potential Mitigations

• You should contact a significant number of former franchisees listed in Exhibit E to understand why they left the system.
• Your accountant should analyze the turnover rates in Item 20, as the high number of terminations is a strong indicator of potential franchisee distress.
• It is crucial to discuss the reasons for this high turnover directly with the franchisor, with guidance from your business advisor.

Explanation

The franchisor entity, BFL, was formed in December 2024 and has no operating history. It was created to acquire the assets of the BurgerFi system after the predecessor's bankruptcy. While the brand has existed since 2011, this new entity's ability to successfully manage the system, provide support, and maintain brand standards is entirely unproven. Investing in a franchise operated by a new, post-bankruptcy entity carries a heightened risk of instability and operational challenges.

Potential Mitigations

• Your business advisor should help you conduct extensive due diligence on the new management team's specific plans for supporting the system post-bankruptcy.
• It is important to have your attorney review the asset purchase agreements from the bankruptcy if available to understand any inherited liabilities.
• Consult with your accountant to assess the financial projections for this new entity and its capitalization.

Explanation

While the management team has experience with other franchise brands, their history includes serious legal issues. Item 3 discloses that the CEO and another key executive were criminally convicted of tax fraud in connection with another franchise system they operate. This history, while not a lack of business experience, raises significant questions about leadership's character, judgment, and ethical practices, which could pose a risk to your investment and the brand's reputation.

Potential Mitigations

• The details of the criminal convictions disclosed in Item 3 must be thoroughly reviewed and discussed with your attorney.
• A business advisor can help you assess the potential reputational and operational risks of partnering with a leadership team with this history.
• It is critical to discuss this issue with current franchisees to understand their perspective on the management team's integrity and leadership.

Explanation

The BurgerFi system was acquired out of bankruptcy by an affiliate of a private credit firm, TREW Capital Management, and then sold to the current parent entity. This ownership structure often implies a focus on financial returns over a specific investment horizon. This could potentially lead to decisions, such as increasing fees or reducing support to cut costs, that prioritize short-term profitability for the investors over the long-term health and success of franchisees.

Potential Mitigations

• Your business advisor should help you research the ownership group's track record with other franchise systems, if any.
• It is important to discuss with current franchisees what changes they have experienced since the new ownership took over.
• Have your attorney carefully review the franchisor's rights to sell or assign the franchise system and the potential implications for you.

Explanation

The FDD discloses a significant and troubled history involving the predecessor franchisor, BurgerFi International, Inc. (BFII). This history includes a Chapter 11 bankruptcy filing in 2024, high franchisee turnover, and litigation. The new franchisor entity even admits it does not possess all of its predecessor's records. This creates a risk of inheriting unresolved systemic issues, a damaged brand reputation, or a disgruntled franchisee base, making the system's future stability uncertain.

Potential Mitigations

• Your attorney must review the bankruptcy filings (Item 4) to understand the scope of the issues that led to the failure of the predecessor.
• It is imperative to speak with long-term franchisees who operated under the predecessor to understand the system's historical challenges.
• A business advisor can help assess how the new management plans to address the issues that plagued its predecessor.

Explanation

Item 3 discloses that the franchisor's current CEO and another key executive were criminally indicted and found guilty of conspiracy to defraud the U.S. and filing false tax returns. They were sentenced to prison and ordered to pay millions in restitution. This is an extremely severe legal history that goes far beyond typical civil disputes. Partnering with a leadership team that has a documented history of financial crimes presents a profound risk to the brand's reputation and your investment.

Potential Mitigations

• You must discuss the gravity of these criminal convictions and their potential impact on the franchise system with your attorney.
• A business advisor can help you evaluate the reputational risk to the brand and your local business that could arise from this leadership history.
• This information should be a key topic of discussion when you speak with current franchisees about their confidence in the franchisor's management.