Explanation

The franchisor, Dirty Dough Franchising LLC (Dirty Dough LLC), is in a precarious financial state. Audited financial statements reveal significant net losses for both 2022 and 2023, and a negative members' equity (deficit) exceeding $2.2 million in both years. The FDD explicitly discloses this financial weakness as a special risk, questioning the company's ability to provide you with necessary services and support. This instability could jeopardize the entire system's viability.

Potential Mitigations

• A franchise accountant must conduct a deep analysis of the financial statements, including the significant related-party transactions and contract liabilities.
• It is critical to ask your business advisor to assess if the franchisor's business model is sustainable without relying heavily on initial franchise fee sales.
• Your attorney should review any state-mandated financial assurances, such as bonds or escrow accounts, that may be required due to this financial weakness.

Explanation

Item 20 data reveals a very high rate of franchisee churn. In the first eight months of 2024 alone, nine franchised outlets ceased operations out of a starting base of 46, representing a significant percentage. This high number of closures is a critical indicator of potential systemic problems, such as a lack of franchisee profitability or inadequate support from Dirty Dough LLC. Such trends could suggest that the business model is not performing as expected for many operators.

Potential Mitigations

• Engaging a business advisor to help you contact a significant number of current and especially former franchisees from the lists in Item 20 is essential to understand why so many have left.
• Your accountant should carefully analyze the turnover data across all tables in Item 20 to calculate the true annual churn rate.
• You should ask your attorney to help you question the franchisor directly about the specific reasons for the high number of ceased operations.

Explanation

The system is undergoing explosive growth, expanding from four franchised units at the end of 2021 to 59 by August 2024, with a stated 290 units reserved in total. This rapid expansion, combined with the franchisor's significant net losses and negative equity, suggests Dirty Dough LLC's resources for providing franchisee support, training, and quality control could be stretched thin. The FDD's special warning about a high number of unopened franchises reinforces this concern.

Potential Mitigations

• It is important to discuss with a business advisor whether the franchisor’s support infrastructure appears capable of handling such explosive growth.
• Your accountant must review the financials to determine if the company can sustain its support obligations without depending on new franchise sales.
• Inquiries should be made to franchisees who opened at different stages of this growth to gauge if support levels have changed over time.

Explanation

Dirty Dough LLC began franchising in late 2021 and explicitly discloses its short operating history as a special risk. The system's founder had no prior franchising experience, and the current experienced CEO only joined in late 2023. This lack of a long, stable track record increases your investment risk, as the business model and support systems are relatively unproven in the long term, which may contribute to the financial instability and high franchisee turnover observed.

Potential Mitigations

• A thorough investigation of the management team's direct experience in both the food industry and in managing a franchise system should be conducted with your business advisor.
• Speaking with the earliest franchisees in the system is crucial to understand the evolution of the brand and support.
• An accountant can help you assess if the franchisor is adequately capitalized to overcome the challenges typical of a new system.

Explanation

The franchise system was founded and operated for its first two years by management with no prior franchising experience listed in the FDD. While the current CEO has extensive experience, they only joined in late 2023. The foundational systems, franchisee relationships, and financial trajectory were established under this inexperienced leadership. This history likely contributes to the significant operational and financial risks, such as high franchisee churn and negative equity, that are present in this offering.

Potential Mitigations

• It is important to discuss with a business advisor how recent management changes might address the system's historical challenges.
• Speaking with franchisees who have been with the system since its early days can provide insight into the impact of the management transition.
• An attorney should review the FDD for any disclosures related to the transition or prior management's departure.