Explanation

The franchisor, Delah Coffee Franchising, LLC (Delah Coffee LLC), explicitly warns of its questionable financial ability to support you. The audited financial statements in Item 21 confirm this, showing only $500 in assets and no operating history. This severe lack of capital raises significant doubts about its capacity to provide promised training, support, and other essential services, potentially jeopardizing your investment if it cannot fulfill its obligations or withstand financial challenges.

Potential Mitigations

• Your accountant must critically assess the franchisor's balance sheet and the significant risk posed by its minimal capitalization.
• It is crucial to ask your attorney about the potential implications of the franchisor's financial weakness and any state-mandated financial assurances.
• Discuss the franchisor's funding and capitalization plans with your business advisor to understand how they intend to support the system's growth.

Explanation

The franchisor projects opening nine new franchised units in the next fiscal year, as shown in Item 20. However, its financial statements in Item 21 reveal minimal capitalization. This plan for rapid expansion combined with very limited financial resources creates a significant risk that the franchisor’s support systems for training, site selection, and operations could be quickly overwhelmed, potentially leaving you without the assistance you need to succeed.

Potential Mitigations

• Your business advisor should help you question the franchisor directly about their specific, funded plans for scaling their support infrastructure.
• An accountant's review of the franchisor's capitalization is critical to assess if they truly have the resources to support projected growth.
• Consult with your attorney regarding the enforceability of the franchisor's support obligations if their resources appear inadequate.

Explanation

Delah Coffee LLC is a new franchisor, formed in late 2024 and beginning to offer franchises in 2025. The FDD explicitly discloses "Short Operating History" as a special risk. Investing in an unproven system like this carries higher risk because its business model, support systems, brand recognition, and long-term viability have not yet been established in the market. You will be one of the first to test the system.

Potential Mitigations

• A thorough investigation of the management team's prior industry and franchising experience, as detailed in Item 2, is crucial; your business advisor can assist.
• Your accountant should perform a detailed analysis of your potential return on investment, considering the heightened risks of a new system.
• Seeking more favorable terms in the franchise agreement to offset the higher risk can be a strategy to discuss with your attorney.

Explanation

The management team detailed in Item 2, while experienced in operating their own Delah Coffee shops, appears to have no prior experience in managing a franchise system. This lack of specific franchising expertise is a significant risk. They may be unprepared for the complexities of providing effective training, support, marketing, and supply chain management to a network of independent franchisees, which could directly impact your business operations.

Potential Mitigations

• Engaging a business advisor to help you question the management team about how they plan to overcome their lack of franchising experience is important.
• Carefully assess whether the franchisor has hired experienced franchise consultants or staff to guide them; this can be a key discussion point.
• Your attorney should scrutinize the franchisor's support obligations in the agreement, as inexperience can lead to unfulfilled promises.

Explanation

Although Item 3 discloses no reportable litigation, Item 13 reveals a significant legal risk: a pending opposition to the registration of the "Delah Coffee" trademarks. An opposer claims prior use of a confusingly similar name. If this challenge is successful, the franchisor might lose the rights to its primary brand name, which could force you to rebrand your business at significant expense and with a loss of brand recognition.

Potential Mitigations

• Your attorney must evaluate the trademark opposition proceeding disclosed in Item 13 to assess the potential risk to your use of the brand name.
• It is critical to discuss the potential financial impact of a forced rebranding with your accountant, including costs for new signage and marketing.
• Seeking contractual protections or indemnification from the franchisor specifically for this pending trademark dispute is a point to negotiate with your attorney.