Explanation

The franchisor, Tectum Franchising LLC (Tectum), explicitly warns of its financial condition as a special risk. Audited financials show a history of net losses in 2022 and 2023, reliance on owner capital contributions, and a relatively low members' equity. While 2024 was profitable, this very short operating history presents a significant risk to the franchisor's ability to provide long-term support, which could jeopardize your investment in this new system.

Potential Mitigations

• A franchise accountant should meticulously review the audited financials, including cash flow statements and all footnotes, to assess the company's viability.
• Discuss the explicit financial risk disclosure with the franchisor and question their plans for achieving sustained profitability and capitalization.
• It is wise to have your attorney investigate whether any state regulators have imposed financial assurance requirements, such as an escrow or bond.

Explanation

This is a new franchise system with no operating Area Representatives as of the end of 2024. Therefore, there is no franchisee turnover data to analyze. The absence of this data means you cannot assess system health or franchisee satisfaction based on historical trends, which is a risk inherent in joining a new, unproven system.

Potential Mitigations

• Your business advisor should help you perform extensive due diligence on the franchisor’s management team and the viability of the underlying unit franchise model.
• Ask the franchisor for their projections on franchisee growth and support infrastructure, and have your accountant review them for reasonableness.
• Engaging an attorney to negotiate more protective terms in your agreement may be prudent to offset the risks of a new system.

Explanation

Tectum is a new franchisor, formed in July 2022 and only began offering Area Representative franchises in late 2024. Item 20 confirms there are no operating Area Representatives. Investing in a new, unproven system carries substantial risk as the business model, franchisee support, and brand recognition are not yet established. The franchisor's success and your investment are therefore speculative.

Potential Mitigations

• Conducting deep due diligence on the business experience and track record of the management team in both franchising and construction is essential.
• An accountant should help you build conservative financial models, as there is no historical franchisee performance data to rely upon.
• Your attorney should be consulted to negotiate terms that might offset the higher risk, such as performance-based protections.

Explanation

While some executives have industry experience, the franchisor itself is new. More significantly, key advisor and owner of the affiliate parent company, John T. Hewitt, has an extensive and serious litigation history detailed in Item 3 from his time at Liberty Tax Service. This history includes disputes with franchisees and governmental actions, which could indicate a concerning management philosophy and presents a significant risk.

Potential Mitigations

• A thorough review of the entire Item 3 litigation history with your attorney is critical to understand the nature and severity of these past issues.
• You should directly question the franchisor about Mr. Hewitt’s current role and influence over the CR3 system.
• Speaking with a business advisor is important to weigh the potential risks associated with this management history against the business opportunity.

Explanation

Item 3 discloses a significant and concerning pattern of past litigation involving John T. Hewitt, a principal of the affiliate parent company, related to his former franchise system, Liberty Tax. The cases include franchisee lawsuits alleging tortious interference, shareholder derivative actions for breach of fiduciary duty, and a DOJ action regarding franchisee fraud. This history suggests a potential for contentious franchisor-franchisee relations.

Potential Mitigations

• It is absolutely critical to have your attorney conduct a detailed review and explanation of every case mentioned in Item 3.
• You should weigh the seriousness of these past issues and their potential to reflect a problematic management culture when making your investment decision.
• Ask the franchisor what measures are in place in the new system to prevent similar issues from arising.