Explanation

D1 Sports Franchise, LLC (D1) explicitly warns of its poor financial condition. The audited financial statements in Exhibit D confirm this, showing a net loss of over $936,000 in 2024 and a negative Member's Deficit exceeding $11.3 million. This significant financial instability raises serious questions about the company's ability to provide long-term support, fund system growth, or even remain a viable business, which could jeopardize your investment.

Potential Mitigations

• Your accountant must conduct a deep analysis of the franchisor's financial statements, including cash flow and the nature of the large member's deficit.
• A business advisor can help you assess if the franchisor's revenue model, heavily reliant on franchise sales, appears sustainable.
• Consulting a franchise attorney is crucial to understand the implications of the franchisor's explicit financial risk warnings.

Explanation

Item 20 data indicates significant franchisee turnover. In 2024, there were 11 exits (cessations and reacquisitions) from a base of 90 franchises, a churn rate over 12%. More concerning is the disclosure of 128 signed agreements for units not yet open, a number greater than all operating units. The franchisor flags this as a special risk, suggesting systemic issues in franchisees getting their locations open and operational, which could affect you.

Potential Mitigations

• A thorough discussion with your franchise attorney about the implications of the high number of unopened franchises is essential.
• Contacting a broad range of current and former franchisees from the lists in Exhibit G is critical to understanding why so many have left or failed to open.
• Your accountant should help you model a worst-case scenario for your own ramp-up period, given these disclosed delays.

Explanation

The system is experiencing very rapid growth, with 37 net new franchised outlets opening in 2024 and another 128 agreements signed for future locations. While growth can be positive, when combined with the franchisor's disclosed financial instability (net losses and significant deficit), it creates a risk that the support infrastructure for training, site selection, and operations may not be able to keep pace, potentially leading to inadequate assistance for new franchisees like you.

Potential Mitigations

• In your discussions with current franchisees, specifically ask about the quality and responsiveness of franchisor support as the system has grown.
• A business advisor can help you question the franchisor about their specific plans to scale their support staff and systems to match this rapid expansion.
• Your accountant should review the franchisor's investment in support infrastructure relative to its revenue from franchise sales.

Explanation

Item 1 discloses that the franchisor is backed by Princeton Equity Group, a private equity (PE) firm. PE ownership can prioritize rapid growth and short-term returns for investors, which may not always align with the long-term health of franchisees. This could manifest as pressure to cut support costs, increase fees, or sell the entire system, creating uncertainty for your investment.

Potential Mitigations

• You should research the PE firm's reputation and its history with other franchise systems with the help of a business advisor.
• When speaking with franchisees, ask if they have observed changes in franchisor priorities or support quality since the PE acquisition.
• Your attorney should review the assignment clause in the Franchise Agreement to understand how a sale of the company could affect you.

Explanation

Item 3 reveals an alarming pattern of recent, serious litigation. This includes multiple lawsuits from current and former franchisees alleging fraud, misrepresentation, and breach of contract, with one group action seeking over $4 million in damages. This volume and severity of franchisee-initiated legal action is a major red flag, suggesting deep, systemic problems in the franchisor's sales process, support, or overall business model.

Potential Mitigations

• A franchise attorney must meticulously review the allegations in each disclosed lawsuit to understand the nature of the franchisee complaints.
• This level of litigation should prompt extensive due diligence, including speaking with as many current and former franchisees as possible.
• You and your legal counsel should consider this a critical risk factor that may weigh against proceeding with the investment.