Explanation

The franchisor’s audited financial statements reveal a significant and worsening members' deficit (negative net worth) of ($81,618) for 2024, along with a history of net losses. Total liabilities substantially exceed total assets. While management plans to overcome this with future growth and owner support, as noted in the financials, this financial position suggests a potential risk to the company's ability to support its franchisees and grow the system without relying on new franchise fees.

Potential Mitigations

• A franchise accountant should thoroughly analyze the franchisor's financial statements, including all footnotes and the auditor's opinion, to assess ongoing viability.
• It is wise to discuss the implications of the franchisor's negative net worth and reliance on owner support with your financial advisor.
• Your attorney can help you understand the risks associated with a financially weak franchisor, particularly regarding their ability to fulfill long-term obligations.

Explanation

Item 20 data reveals that in 2022, one of the three existing franchised units at the start of the year ceased operations. This represents a 33% unit churn in a single year for the very small system. While the franchisor provides a reason in a footnote (an urban vs. suburban location), such a high turnover rate in the system's recent history is a significant indicator of potential systemic challenges or franchisee difficulties that could impact your own success.

Potential Mitigations

• Speaking with the former franchisee who ceased operations is critical to understanding why they left; your attorney can help prepare questions for this discussion.
• Your business advisor can help you analyze the turnover data in the context of the system's small size and growth projections.
• Careful financial modeling with your accountant should account for the possibility of underperformance suggested by this historical data.

Explanation

The franchisor plans for rapid percentage growth in 2025, projecting five new franchised outlets on top of the five existing at year-end 2024. Combined with the franchisor's disclosed financial weakness, including a members' deficit and history of losses, this rapid expansion could strain its limited resources. This may impact the quality and availability of essential training, site selection assistance, and ongoing operational support for all franchisees as the system scales.

Potential Mitigations

• Asking the franchisor directly about their specific plans to scale support staff and infrastructure to match the projected unit growth is a key due diligence step to take with your business advisor.
• In discussions with current franchisees, it is important to inquire about the current quality and responsiveness of franchisor support.
• An accountant's review of the franchisor's financials can help assess if they have the capital to adequately support this growth.

Explanation

Conquer Franchising, LLC (Conquer LLC) began franchising in 2018 and has a small number of operating units, as shown in Item 20. This limited history, combined with the financial weaknesses disclosed in Item 21, presents a risk. An unproven system may have underdeveloped support structures, lower brand recognition, and a business model that is not yet validated over the long term, which could increase the potential for business failure compared to more established franchise systems.

Potential Mitigations

• A business advisor can help you conduct extensive due diligence on the backgrounds of the management team listed in Item 2.
• Contacting the earliest franchisees in the system to discuss their experience with the franchisor's evolution and support is highly recommended.
• Your attorney should be consulted to evaluate if additional contractual protections can be negotiated to offset the risks of a new system.

Explanation

Item 2 shows that while the founders have operated similar businesses since 2015, their experience as franchisors is limited to this entity, which was formed in 2018. This relative inexperience in managing a franchise system, coupled with the company's disclosed financial weaknesses in Item 21, presents a risk. Inexperienced franchisors may provide less effective support, training, and strategic guidance, potentially impacting your operational success and the overall health of the brand.

Potential Mitigations

• During your due diligence calls with existing franchisees, asking specific questions about the quality and effectiveness of management's support is essential.
• A business advisor can help you assess whether the management team's skills are well-suited for growing a national franchise system.
• Your attorney can help you understand the contractual obligations for support and whether they are specific enough.

Explanation

The franchisor's financial statements in Item 21 indicate a members' deficit and a history of losses. A note to the financials states that the company's ownership has sufficient resources to support operations. This implies a reliance on the parent companies for financial stability. However, the FDD does not include the financial statements for these parent companies, creating a significant information gap and making it difficult to fully assess the true financial backing of the franchise system.

Potential Mitigations

• Your accountant must review the franchisor's financials and the note regarding owner support to assess the level of risk.
• It is important to ask the franchisor for financial statements of the parent companies, as their stability is critical; your attorney can formalize this request.
• The implications of investing in a system that relies on guarantees from entities whose financials are not disclosed should be discussed with your financial advisor.