Explanation

BYou Franchising LLC's (BYou) audited financials show net losses and a members' deficit (negative net worth) for 2022 and 2023. While 2024 financials show a net profit, the company's cash balance is very low and liabilities remain high. This history of losses and fragile current position may indicate a financial weakness that could impact its ability to support you, grow the brand, or remain solvent.

Potential Mitigations

• A franchise accountant should perform a detailed review of all three years of financial statements, including footnotes, to assess the company's viability and capital adequacy.
• Discuss the franchisor's financial turnaround and plans for maintaining profitability and cash flow with your business advisor.
• Your attorney can help you understand any financial assurance requirements, like bonds or escrow, that might be imposed by state regulators due to weak financials.

Explanation

The FDD reveals a significant risk in its franchisee turnover data. In 2024, the system started with four franchised outlets and experienced two terminations, which is a 50% termination rate based on the number of units at the start of the year. An extremely high turnover rate like this is a critical red flag that may signal systemic problems, franchisee dissatisfaction, or issues with the business model's viability or the franchisor's support.

Potential Mitigations

• Your attorney and accountant must help you scrutinize the Item 20 data and understand the profound risk indicated by such a high termination rate.
• It is crucial to contact the former franchisee listed in Exhibit E and a significant number of current franchisees to discuss their experiences and reasons for the high turnover.
• A business advisor can help you assess whether the potential rewards of this franchise justify the significant risk demonstrated by the turnover data.

Explanation

The franchise system experienced very rapid initial growth, expanding from one to four units in 2023. This rapid expansion, combined with the franchisor's limited operating history, prior-year losses, and subsequent high termination rate, suggests that its support infrastructure may be strained. Rapid growth without adequate support systems in place can lead to widespread operational challenges for franchisees.

Potential Mitigations

• Question the franchisor directly about their specific plans and resources for scaling franchisee support systems with a business advisor's guidance.
• In your discussions with current franchisees, specifically inquire about the quality and responsiveness of the training and ongoing support they have received.
• Your accountant should evaluate whether the franchisor's current financial condition can sustain the necessary support infrastructure for its franchisees.

Explanation

BYou began offering franchises in late 2021, making it a very new and unproven system. The FDD shows a limited number of operating units and a short track record. Investing in an emerging system carries higher intrinsic risks, including the potential for an unrefined business model, underdeveloped support systems, and minimal brand recognition, all of which are compounded by the high turnover rate disclosed in Item 20.

Potential Mitigations

• Engage a business advisor to conduct extensive due diligence on the viability of this new business model and the brand's market potential.
• Your attorney should help you scrutinize the agreement for any protections that might offset the higher risk associated with a new system.
• Speaking with the earliest franchisees on the Item 20 list is critical to understanding the real-world challenges of being part of this emerging brand.

Explanation

According to Item 2, the management team has direct experience primarily within its own affiliated companies, and the franchise entity itself has only existed since late 2021. The lack of a long-term track record in managing this specific franchise system is a notable risk. Inexperienced franchise management can sometimes lead to challenges in providing robust franchisee support, which may be a contributing factor to the high turnover seen in Item 20.

Potential Mitigations

• A business advisor can help you thoroughly vet the specific franchising and operational experience of each member of the management team.
• When speaking with current franchisees, ask detailed questions about the quality, expertise, and responsiveness of the management and support teams.
• Your attorney may suggest seeking stronger contractual commitments for support and training to mitigate risks from management's limited franchise-system track record.