Explanation

The financial statements for Burgerim Group USA, Inc. (Burgerim) indicate significant potential instability. The 2016 balance sheet showed a stockholder's deficit, and while later years show positive equity, this appears heavily reliant on initial franchise fee revenue rather than sustainable royalties. The 2018 statement reveals a drastic drop in cash, suggesting a high burn rate. This reliance on franchise sales for operating capital is a significant risk to the franchisor's long-term ability to support you.

Potential Mitigations

• Your accountant must conduct a thorough review of all provided financial statements, including footnotes, to assess the company's viability and cash flow.
• It is vital to discuss with a financial advisor the risks of investing in a system that appears to depend on franchise sales for its operational funding.
• Seeking legal counsel to understand any state-mandated financial assurances, such as bonds or impound accounts for the initial fee, is advisable.

Explanation

Item 20 data reveals a state of hyper-growth, expanding from one unit to 109 in just two years (2017-2018), with 452 additional agreements signed but not yet open. This rate of sales far outpaces the rate of openings, suggesting the franchisor's business model may focus more on selling franchises than supporting them. Such rapid expansion creates a significant risk of future high franchisee failure and turnover due to potentially inadequate support infrastructure.

Potential Mitigations

• A discussion with your business advisor is essential to evaluate the risks associated with investing in a hyper-growth system.
• You should contact a wide range of franchisees from the list in Exhibit D, especially those who have been open the longest, to inquire about the quality of ongoing support.
• Your accountant can help you model the financial impact of potential support failures or delays in opening.

Explanation

The system expanded from 23 to 109 franchised outlets in 2018 and disclosed having 452 franchise agreements signed for units that were not yet open. This explosive growth rate is a major red flag. It strongly suggests the franchisor's support systems for training, site selection, and operations may be overwhelmed, potentially leading to inadequate assistance for new franchisees like you. This significantly increases the risk of operational challenges and potential failure.

Potential Mitigations

• You should ask the franchisor for specific details on their support staff size and franchisee-to-support staff ratio with help from your business advisor.
• Inquiring with recent franchisees about their opening experience and the quality of support they received is a crucial due diligence step.
• Legal counsel should review the franchisor's contractual support obligations to determine if they are specific and enforceable.

Explanation

Burgerim began franchising in 2016 and shows a very limited operating history as a franchisor. While the business concept existed prior, the ability to successfully build and manage a large, supportive franchise network is unproven. Investing in a young system carries higher risks, including the potential for an untested business model, underdeveloped support structures, and minimal brand recognition, which can directly impact your potential for success.

Potential Mitigations

• A business advisor can help you conduct in-depth due diligence on the management team's specific experience in building and supporting a franchise system.
• Engaging with the earliest franchisees to understand the evolution of the system and its support is highly recommended.
• Your accountant should carefully assess the franchisor's capitalization to determine if it has sufficient funds to sustain operations and support growth.

Explanation

The FDD package explicitly discloses several key risks on the State Cover Page. It warns that dispute resolution is required to take place only in California and will be governed by California law. These disclosures confirm that you may face the cost and inconvenience of out-of-state litigation or arbitration under laws that may be less favorable to you than your home state's laws. These are significant legal and financial considerations.

Potential Mitigations

• Your franchise attorney must explain the legal and practical consequences of the California venue and choice-of-law provisions.
• You should consult with your attorney regarding any state-specific franchise laws that may override these contractual clauses.
• An accountant can help you budget for the potential increase in legal costs associated with an out-of-state dispute.

Explanation

Burgerim explicitly states in Item 19 that it does not provide any Financial Performance Representation (FPR). This absence of historical financial data from the franchisor makes it significantly more challenging for you to independently assess the franchise's earnings potential and create reliable financial projections. This lack of transparency may indicate that franchisee performance varies widely or is not consistently profitable, increasing your investment risk.

Potential Mitigations

• You must perform extensive financial due diligence by interviewing a large and diverse group of current and former franchisees about their actual revenues and expenses.
• Working with an accountant is crucial to build your own financial projections from scratch, using conservative assumptions based on your research.
• Your attorney will advise that you cannot rely on any informal earnings claims made by the franchisor or its representatives.

Explanation

While the FDD discloses data, it obscures the material fact of its underlying business model. The financials in Item 21 show extreme dependence on franchise fee revenue, and Item 20 shows a staggering 452 signed agreements for unopened stores versus only 109 open ones. This strongly suggests the primary business is selling franchises, not supporting a network of profitable restaurants. This core fact about the business's nature and stability is obscured within complex tables and financials.

Potential Mitigations

• It is critical that your accountant and attorney review the entire FDD package to piece together the true nature of the franchisor's business model.
• You should directly question the franchisor about the high ratio of sold-but-unopened units and their plan to support them.
• A business advisor can help you assess the immense risk of joining a system that may be structured like a sales scheme.

Explanation

The data in Item 20 is highly questionable. The tables show zero terminations, non-renewals, or franchisor re-acquisitions during a period of explosive growth from 1 to 109 units. This is statistically improbable and suggests the data may be misleadingly presented, perhaps because new units have not had time to fail yet. The most concerning data is the 452 signed but unopened franchises, indicating a massive backlog and potential for future systemic failure.

Potential Mitigations

• Your accountant and attorney should treat the Item 20 data with extreme skepticism.
• A crucial step is to contact a significant number of franchisees listed as being in operation to verify their status and experience.
• You should ask the franchisor to explain the zero-turnover data and the large backlog of unopened stores.

Explanation

This Franchise Disclosure Document is dated April 3, 2019. As this analysis is being conducted long after that date, the information contained within is severely outdated and does not reflect the significant material events that have since transpired with the company. Making an investment decision based on this document would be extraordinarily risky, as it is not compliant with legal requirements for current information.

Potential Mitigations

• Under no circumstances should you rely on this outdated document; your attorney must advise you of this immediately.
• A demand for the most current, legally compliant FDD is the only appropriate action before proceeding with any evaluation.
• It is essential to conduct independent research with a business advisor into the company's history since 2019.

Explanation

You are required to pay a weekly royalty of 5% of Gross Sales, which begins after the first three months of operation. In addition, you must pay a flat Brand Development Fee of $2,000 per month. This combination, especially the significant flat monthly fee, can be very burdensome, particularly for a new business with fluctuating or low initial sales volumes. These fees are payable regardless of your restaurant's profitability.

Potential Mitigations

• Your accountant must create detailed financial projections to determine the sales volume required to comfortably cover these ongoing fees.
• It is important to analyze the impact of the $2,000 flat monthly fee on your cash flow during low-sales periods with your financial advisor.
• Your attorney can help you understand all fee obligations and when they commence.

Explanation

Item 6 details a long list of potential additional fees beyond the standard royalty. These include a $10,000 transfer fee, a $10,000 renewal fee, audit costs, interest on late payments at 18%, and reimbursement of the franchisor's insurance costs plus a 10% administrative fee if you fail to maintain your own coverage. The quantity and potential magnitude of these fees could significantly and unexpectedly increase your operating costs over time.

Potential Mitigations

• A thorough review of every fee listed in Item 6 with your accountant is necessary to budget for these potential costs.
• Your attorney should analyze the conditions under which these fees can be imposed.
• Speaking with current franchisees about which of these fees they have actually been charged can provide practical insight.

Explanation

The Franchise Agreement requires you to perform remodels and technology upgrades at the franchisor's direction. While remodels are stated to be no more frequent than every five years, the cost is not defined or capped. Furthermore, you must comply with any changes to technology, which the agreement notes may be unpredictable. This creates the risk of significant, unbudgeted capital expenditures throughout the term of your agreement, which could strain your finances.

Potential Mitigations

• It is crucial to discuss with your accountant the need to build a substantial capital reserve fund for future mandated upgrades.
• You should ask the franchisor for a history of past required upgrades and their typical costs when talking to a business advisor.
• Your attorney could attempt to negotiate for a cap on capital expenditures required in any given year.

Explanation

The estimated initial investment range of $194,700 to $683,000 is extremely wide, which makes precise financial planning difficult. More alarmingly, the estimate for "Additional Funds" (working capital for the first three months) is only $5,000 to $15,000. For a new restaurant, this amount is grossly insufficient to cover initial operating losses, payroll, and unforeseen expenses, creating a high risk of undercapitalization and early business failure.

Potential Mitigations

• You absolutely must develop your own detailed, market-specific startup budget with the help of an accountant.
• It is critical to secure significantly more working capital than the FDD estimates, sufficient to cover expenses for at least 6 to 12 months.
• Interviewing franchisees in your area about their actual startup costs is a necessary step to create a realistic budget.

Explanation

The Franchise Agreement includes a very broad waiver of damages. You are required to waive any right to claim punitive, special, consequential, or other damages, including lost profits. This means that even if the franchisor's actions cause your business to fail, your ability to recover your actual financial losses in a dispute could be severely limited, potentially to only direct damages, which may be much smaller.

Potential Mitigations

• Your franchise attorney must explain the significant impact this clause has on your legal rights and potential remedies.
• It would be prudent to ask your attorney to negotiate for the removal of this waiver, or at least to carve out exceptions for the franchisor's gross negligence or willful misconduct.
• An insurance broker should be consulted to explore business interruption or other insurance policies that might cover some of these otherwise waived losses.

Explanation

The FDD package requires you to sign numerous ancillary agreements that create significant obligations and risks. These include a Collateral Assignment of Lease, which gives the franchisor control over your location upon default, and an Irrevocable Power of Attorney for tax matters. These agreements, which are binding contracts, contain complex legal terms that could put you at a disadvantage and must be reviewed as carefully as the main Franchise Agreement.

Potential Mitigations

• It is absolutely essential that your franchise attorney reviews every single ancillary agreement and explains the specific risks and obligations each one creates.
• You should not sign any ancillary document without fully understanding its purpose and potential consequences.
• Your attorney may be able to negotiate modifications to the most problematic terms in these side agreements.

Explanation

The Franchise Agreement contains a standard integration clause stating it represents the entire agreement. More significantly, you are required to sign a detailed Acknowledgment Statement (Exhibit J) in which you affirm that you have not relied on any financial projections or promises made outside of the written FDD. Franchisors use these clauses to make it very difficult for you to bring a legal claim based on misleading statements made by a salesperson or broker.

Potential Mitigations

• Your attorney will advise that any crucial promise or representation made to you must be put in writing and incorporated into the Franchise Agreement as an addendum.
• You must answer the questions in the Acknowledgment Statement truthfully; do not sign it if it contains inaccurate statements.
• It is essential to document all important communications with the franchisor and its representatives, and to share them with your attorney.

Explanation

The Franchise Agreement mandates that any arbitration or litigation must take place in Los Angeles County, California. This is explicitly highlighted as a risk factor. For a franchisee located elsewhere, this presents a significant disadvantage, requiring you to incur substantial travel, time, and expense to resolve a dispute. It also gives the franchisor a 'home court' advantage.

Potential Mitigations

• Your attorney must advise you on the enforceability of this clause, as some states have laws that may void out-of-state forum requirements.
• Budgeting for potential increased legal expenses due to this clause is a necessary step for your accountant to undertake.
• Your attorney might attempt to negotiate for dispute resolution to occur in a neutral location, though this is often difficult.

Explanation

The agreement requires that California law be used to interpret the contract and resolve disputes. This is also disclosed as a key risk factor. The laws of California may offer fewer protections to franchisees compared to the laws of your home state, particularly regarding termination, renewal, and non-compete agreements. This can significantly affect the outcome of any legal dispute.

Potential Mitigations

• It is essential that your franchise attorney is familiar with both California franchise law and your home state's laws to advise on the differences.
• You should ask your attorney if any franchise relationship laws in your state are mandatory and would override this choice-of-law clause.
• Understanding how California courts interpret key franchise agreement provisions is critical before signing.

Explanation

Item 12 clearly states that if your restaurant is located in a non-traditional site (like a mall or airport) or a major metropolitan area, you will not be granted any protected territory. This means Burgerim could allow another franchisee, or even open a company-owned store, right next to yours, creating direct competition that could severely impact your sales and viability. This lack of exclusivity is a very significant risk.

Potential Mitigations

• It is critical to have a real estate professional and business advisor help you assess the competitive landscape before selecting a site with no territorial protection.
• Your attorney should seek to get a very precise definition from the franchisor of what constitutes a 'major metropolitan area'.
• You must carefully model the financial impact of potential nearby competition with your accountant.

Explanation

Even if you are granted a territory, the Franchise Agreement gives Burgerim broad and explicit rights to sell its products through "alternative distribution channels" both within and outside your territory. This includes sales on the internet, in grocery stores, and through other means. This means the franchisor can compete directly with you in your own market, potentially siphoning off customers and sales, and you will not receive any compensation for these sales.

Potential Mitigations

• Your attorney should attempt to negotiate for some form of revenue sharing or compensation for sales made by the franchisor through these channels in your territory.
• It's important to have a business advisor help you assess the potential impact of this direct competition on your business model.
• You should ask the franchisor for their current and future plans regarding sales through these alternative channels.

Explanation

The Franchise Agreement reserves all rights for Burgerim to sell products through any method of distribution, including the internet, and states you will not receive any compensation for such sales. This creates a direct conflict where the franchisor's e-commerce efforts could pull customers away from your physical location. There is no system described for allocating revenue or giving you credit for online orders that originate from or are delivered within your territory.

Potential Mitigations

• The risks of this direct, uncompensated online competition should be thoroughly discussed with your attorney and business advisor.
• Your attorney could attempt to negotiate a policy for revenue sharing or a fulfillment fee for online orders that you service or that are delivered in your area.
• An accountant should help you model the potential negative impact of the franchisor's e-commerce sales on your projected revenue.

Explanation

As a principal owner, you are required to sign an 'unconditional and irrevocable' personal guaranty for all obligations of your business under the Franchise Agreement. This is a critical risk, as it bypasses any liability protection from your corporate entity (like an LLC or corporation) and puts your personal assets—such as your home, savings, and other investments—at risk to satisfy any debts or legal judgments against the franchised business.

Potential Mitigations

• Your attorney must explain the full scope of this personal liability and the assets it puts at risk.
• While difficult, your attorney could attempt to negotiate a cap on the guaranty amount or have it expire after a certain number of years of good performance.
• A discussion with your financial advisor about asset protection strategies is essential before signing an unlimited guaranty.

Explanation

The Franchise Agreement's definition of "Principals" explicitly includes the spouse of an individual franchisee. Since all Principals are typically required to sign the personal guaranty, this effectively forces your spouse to personally guarantee all debts and obligations of the business, even if they have no ownership or involvement. This extends the significant financial risk of the business to your entire family's personal assets.

Potential Mitigations

• It is crucial that your attorney challenge this requirement, as it may not be enforceable under the Equal Credit Opportunity Act unless your spouse's assets are necessary for qualification.
• You should not allow your spouse to sign any documents without them first receiving independent legal advice from their own attorney.
• If the guaranty is unavoidable, your attorney should fight to limit its scope or duration for your spouse.

Explanation

The Franchise Agreement contains a very broad, one-sided indemnification clause. You are required to protect Burgerim from nearly any claim arising from your restaurant's operation, potentially even if the claim results from you following the franchisor's required procedures. However, the franchisor provides very little reciprocal indemnification to you. This shifts a disproportionate amount of legal and financial risk onto you.

Potential Mitigations

• An insurance broker must review this clause to ensure your general liability insurance is adequate to cover these extensive contractual obligations.
• Your attorney should attempt to negotiate for a mutual indemnification clause, where each party is responsible for its own negligence.
• It is crucial to ask your attorney to carve out claims arising from the franchisor's own negligence or its defective system standards from your obligation.

Explanation

As a condition of signing, you must complete a detailed "Franchisee Disclosure Acknowledgment Statement." This form requires you to state that you did not rely on any sales or earnings promises from the franchisor or its brokers. This document is a legal tool designed to make it very difficult for you to sue the franchisor for fraud or misrepresentation if the promises made to you during the sales process turn out to be false.

Potential Mitigations

• You must review every question on this form with your attorney and answer each one with complete honesty.
• If you received any verbal promises or projections that were important to your decision, you must disclose them on the form, as advised by your attorney.
• Do not sign this acknowledgment if it contains any statements that are not true, as it could severely damage your legal rights later.

Explanation

Many of the franchisor's support obligations outlined in the agreement are qualified with vague or discretionary language, such as "as we deem advisable" or at the franchisor's "discretion." This makes the promises of support difficult to enforce. You have absolute, binding obligations to pay fees, but the franchisor's obligations to provide the services you are paying for may be illusory, creating a significant imbalance in the relationship.

Potential Mitigations

• Your attorney must identify all clauses that give the franchisor discretion and attempt to negotiate for more specific, objective, and mandatory support commitments.
• It is advisable to ask current franchisees about the actual level and quality of support they receive, regardless of what the contract says.
• You should document all requests for support and the franchisor's response, as advised by your legal counsel.

Explanation

The initial training program described in Item 11 lasts only four to six days, with a heavy emphasis on on-the-job training and only five hours of classroom orientation. For a new restaurant owner, especially in a system undergoing such chaotic growth, this level of initial training appears to be grossly inadequate. Insufficient training can lead to major operational errors, poor financial performance, and a much higher risk of business failure.

Potential Mitigations

• You must assess your own business and restaurant experience honestly to determine if this training is sufficient for you.
• A business advisor with industry experience should be consulted to evaluate the adequacy of the proposed training program.
• Inquiring with recent franchisees about how prepared they felt after completing the training is a critical due diligence step.

Explanation

The Franchise Agreement grants Burgerim the sweeping right to unilaterally change almost any aspect of the business system at any time. This includes your required products, services, equipment, and even the brand's trademarks and logos. You are required to comply with these changes at your own expense. This creates enormous uncertainty and risk, as a future change could fundamentally alter your business model or require a significant, unbudgeted investment.

Potential Mitigations

• Your attorney must explain the immense power this clause gives the franchisor.
• It is advisable to ask your attorney to negotiate for limitations on this right, such as requiring changes to be economically reasonable or capping your related expenses.
• You should discuss with current franchisees how the franchisor has used this power to change the system in the past.

Explanation

Under the Franchise Agreement, you are required to pay the full cost of complying with any and all changes the franchisor decides to make to the system. This could include expensive new equipment, technology upgrades, or a complete remodel of your restaurant. This obligation to fund the franchisor's evolving strategy, regardless of the cost or benefit to you, represents a significant and unpredictable financial risk.

Potential Mitigations

• Your accountant must help you plan for a substantial capital reserve fund to cover potential future mandated changes.
• It is critical to ask your attorney to negotiate for cost-sharing with the franchisor for major, system-wide mandates.
• A discussion with a business advisor about the franchisor's track record for imposing costly changes is a key due diligence step.

Explanation

You are required to purchase supplies from a list of approved suppliers. The FDD discloses that in 2018, Burgerim earned over $300,000 in revenue from these suppliers based on their sales to franchisees. This is a significant conflict of interest. It suggests that you may be required to pay inflated prices for goods because the franchisor is benefiting financially from your purchases, which directly harms your profitability.

Potential Mitigations

• Your accountant should research open-market pricing for similar goods to estimate the potential overcharge from mandated suppliers.
• It is important to ask your attorney to negotiate for a clear and fair process to approve alternative suppliers who can meet quality standards at a lower cost.
• You should discuss supplier pricing and quality with current franchisees to understand the real-world impact of this policy.

Explanation

The Franchise Agreement gives Burgerim the right to approve or disapprove any new suppliers you wish to use, but the process and criteria for this approval are at their discretion. The agreement states that the franchisor is not required to approve any particular supplier. This can effectively prevent you from finding lower-cost alternatives for non-proprietary goods, locking you into the franchisor's potentially more expensive supply chain.

Potential Mitigations

• An important negotiation point for your attorney is to seek objective, reasonable standards for the approval of new suppliers.
• You should request that the franchisor provide a clear, written process and timeline for evaluating potential new suppliers.
• Discussing the real-world difficulty of getting new suppliers approved with current franchisees is essential.

Explanation

Burgerim retains final approval over your restaurant's location and requires you to sign a Collateral Assignment of Lease. This gives the franchisor significant legal control over your physical premises. If you default on your Franchise Agreement, the franchisor can potentially take over your lease, leaving you with nothing. This level of control creates a major power imbalance and adds risk to your real estate investment.

Potential Mitigations

• You must engage an independent real estate attorney to review the lease and the required Collateral Assignment of Lease.
• Your attorney should attempt to negotiate the terms of the lease assignment to protect your interests in a default scenario.
• A real estate professional should assist you in finding a location that meets both your needs and the franchisor's criteria.

Explanation

The requirement to sign a Collateral Assignment of Lease gives the franchisor the right to step in and take over your lease if you default on either the lease or the Franchise Agreement (due to cross-default clauses). This creates a significant risk where you could lose your business location and potentially remain personally liable for the rent payments, even after your franchise rights have been terminated.

Potential Mitigations

• It is absolutely critical to have a real estate attorney review the lease, the assignment, and the cross-default provisions.
• Your attorney should attempt to negotiate for a release from your lease obligations if the franchisor chooses to take over the lease.
• A thorough understanding of how a default under one agreement affects the other is a key discussion to have with your attorney.

Explanation

You are required to purchase and use the specific computer and Point of Sale (POS) systems mandated by the franchisor, with initial costs estimated up to $10,000 plus ongoing monthly fees. The Franchise Agreement gives the franchisor the right to require you to upgrade this technology at any time, at your sole expense. This creates a risk of significant, recurring, and unpredictable technology costs over the life of your franchise.

Potential Mitigations

• Your accountant should help you budget for both the initial and potential future costs of technology upgrades.
• It is prudent to discuss the reliability, functionality, and cost of the current required systems with existing franchisees.
• Your attorney can attempt to negotiate for caps on technology-related fees or a more predictable upgrade schedule.

Explanation

If your franchise is terminated for cause, you are contractually liable for liquidated damages equal to the franchisor's lost future royalties. This amount is calculated as your average monthly royalty payment multiplied by 24 months, or the number of months left on your agreement, whichever is greater. This can create a devastating financial liability, forcing you to pay for years of royalties on a business that has already failed.

Potential Mitigations

• Your attorney must explain the severe consequences of this liquidated damages clause.
• It is highly advisable for your attorney to attempt to negotiate this clause out of the agreement, or at least to cap the total amount.
• Your accountant should model this potential liability so you fully understand the financial risk you are taking on.

Explanation

The post-termination non-compete covenant is extremely broad. It prohibits you from having any interest in a similar business for two years, within a 25-mile radius of ANY Burgerim restaurant in the system. Given the company's rapid growth plans, this could effectively act as a nationwide ban, severely restricting your ability to use your industry experience to earn a living after you leave the franchise.

Potential Mitigations

• Your attorney must advise you on the enforceability of such a broad non-compete under your state's laws, as many states would find it unreasonable.
• It is crucial to have your attorney negotiate to limit the non-compete's geographic scope to a small radius around only your former location.
• You should understand that this clause could significantly impact your future career options before signing.

Explanation

The Franchise Agreement is a long and detailed contract, and you are obligated to comply with all of its terms, as well as the terms of the ever-changing Operations Manual. A failure to comply with any single provision could be deemed a default, giving the franchisor the right to terminate your franchise. This would result in the loss of your entire investment and business, making strict, ongoing compliance absolutely critical.

Potential Mitigations

• A thorough and complete review of every obligation in the Franchise Agreement and Operations Manual with your attorney is non-negotiable.
• Implementing a detailed compliance checklist and regular operational reviews for your management team is a critical business practice.
• If you ever receive a notice of default from the franchisor, you must contact your attorney immediately.

Explanation

The agreement contains a cross-default clause, meaning that if you default on any other agreement with the franchisor or its affiliates (such as a lease for another location or a software license), it is automatically considered a default of this Franchise Agreement. This can create a domino effect, where a single, possibly minor, issue at one location could give the franchisor the right to terminate all of your franchises, dramatically increasing your risk.

Potential Mitigations

• Your attorney should attempt to negotiate this clause out of the agreement, or at least limit its scope.
• It is important to seek a provision that each agreement stands on its own, with its own separate rights to cure any defaults.
• Meticulous management and compliance across all your business dealings with the franchisor is essential to avoid triggering this clause.

Explanation

The Franchise Agreement gives you very short periods to fix, or 'cure,' a default. For example, you may have only 24 hours to correct an unauthorized use of the trademarks. Several other serious defaults have no cure period at all, meaning the franchisor can terminate your agreement immediately. This high-pressure environment leaves little room for error and makes it very easy for the franchisor to terminate your franchise.

Potential Mitigations

• Your attorney must review the termination provisions and advise you on the risks associated with the short cure periods.
• It may be possible for your attorney to negotiate for longer, more reasonable cure periods, especially for non-monetary defaults.
• You must have systems in place to ensure constant compliance to avoid triggering a default that you have little or no time to fix.

Explanation

The Franchise Agreement provides a long list of reasons why Burgerim can terminate your rights, but it provides you with no reciprocal right to terminate the agreement. Even if the franchisor fails to provide promised support or breaches its contractual obligations, you are still bound to the contract. This severe imbalance of power leaves you with little recourse other than costly arbitration or litigation if the franchisor does not perform.

Potential Mitigations

• A key negotiation point for your attorney should be to add mutual termination rights, allowing you to exit the agreement if the franchisor commits a material, uncured breach.
• You should carefully document every instance of franchisor non-performance to build a case, as advised by your attorney.
• Understanding this one-sidedness is crucial to assessing the overall risk of the investment.

Explanation

The agreement gives Burgerim "Step-In Rights," allowing them to take over the operation of your business if they judge it to be in jeopardy. The triggers for this are subjective. If this right is exercised, you would lose control over your business and be charged for the franchisor's management expenses. This is a significant power that could be used to push you out of the system under the guise of protecting the brand.

Potential Mitigations

• Your attorney must seek to negotiate for clear, objective triggers for any step-in rights.
• It is essential to clarify your rights and the financial arrangements during any period of franchisor-managed operation.
• Constant communication and documented compliance are the best defenses against the subjective use of this clause.

Explanation

Your right to renew the franchise after the initial 10-year term is not automatic. You must meet numerous difficult conditions, including paying a $10,000 renewal fee, completing potentially expensive remodels, and signing the 'then-current' Franchise Agreement, which could have much worse terms. You must also sign a general release, giving up your right to sue the franchisor for any past issues. These conditions give the franchisor tremendous leverage at renewal.

Potential Mitigations

• Your attorney should attempt to negotiate for a more guaranteed right of renewal, based on your being in good standing.
• It is crucial to try and cap future renewal fees and required remodeling expenses.
• The requirement to sign a general release is a major concession; your attorney should advise on its implications and try to limit its scope.

Explanation

When you want to sell your business, the buyer is required to sign the Franchise Agreement that Burgerim is offering to new franchisees at that time. This future agreement could have higher fees, a smaller territory, or more restrictions than your current contract. This makes your business less valuable and harder to sell, as a buyer's potential return will be based on the less favorable, new terms.

Potential Mitigations

• Your attorney should try to negotiate for your buyer to have the right to assume your existing agreement.
• A financial advisor must be consulted when you plan your exit strategy to account for the impact this clause will have on your business's resale value.
• Understanding this is a significant long-term risk to your ability to realize the equity in your business is critical.

Explanation

The Franchise Agreement gives Burgerim significant control over whether you can sell your business. While it states consent to a transfer will not be "unreasonably withheld," it also provides a long list of conditions that give the franchisor broad discretion to deny a potential buyer. This power could be used to block a sale or steer it towards a buyer preferred by the franchisor, harming your ability to exit the system on your own terms.

Potential Mitigations

• It's important for your attorney to attempt to negotiate for more objective, clear criteria for buyer approval.
• You should request that the franchisor provide a defined timeline and process for reviewing and approving a proposed transfer.
• Speaking with franchisees who have sold their business can provide insight into how the franchisor has exercised this power in practice.

Explanation

Item 3 litigation reveals a concerning and unusual pattern where Burgerim or its directors have entered into leases or provided guarantees on leases for its franchisees. This deep financial entanglement in franchisee real estate creates significant potential conflicts of interest and systemic risk. If multiple of these guaranteed franchisees fail, it could trigger a cascade of liabilities that jeopardizes the financial stability of the entire franchise system.

Potential Mitigations

• It is crucial to have your attorney investigate the nature of the franchisor's role in the site selection and leasing process.
• A discussion with your real estate professional is necessary to understand the risks of having a franchisor as your landlord or lease guarantor.
• Engage your financial advisor to assess the potential impact of the franchisor's lease liabilities on its overall financial stability.