Explanation

The franchisor's audited financial statements reveal significant and worsening financial instability. Door Renew International, LLC (Door Renew) operated with a net loss of over $1 million in both 2023 and 2024, and its total liabilities exceeded its total assets, resulting in a members' deficit (negative net worth) of over $3.2 million by year-end 2024. This raises substantial doubt about its ability to support franchisees or even remain a going concern, a critical risk to your investment.

Potential Mitigations

• A franchise accountant must thoroughly analyze these financials, including all notes, to assess the franchisor's viability and dependence on new franchise fees.
• Discuss the implications of the negative net worth and recurring losses on the franchisor's ability to provide promised support with your business advisor.
• Your attorney should investigate if any financial assurances, such as a bond or escrow, are required by the state due to this financial weakness.

Explanation

Item 20 data reveals an exceptionally high franchisee turnover rate. In 2024, 10 of the 20 outlets that started the year exited the system through non-renewal, reacquisition, or ceasing operations. This 50% annual turnover rate is a critical red flag, strongly suggesting systemic problems within the franchise, such as lack of profitability, franchisee dissatisfaction, or inadequate support. This represents a severe risk to the potential success and sustainability of your own franchised business.

Potential Mitigations

• It is imperative to contact a significant number of former franchisees listed in Exhibit E to understand the specific reasons for this high turnover.
• Your accountant should analyze the turnover data across all categories (terminations, cessations, non-renewals) to gauge the full extent of system distress.
• Your attorney should advise on the risks implied by such a high failure and exit rate before you make any commitment.

Explanation

The franchisor experienced very rapid growth in 2022, expanding from 8 to 18 units, before stalling and then shrinking significantly in 2024. This pattern, coupled with the company's severe financial instability and high franchisee turnover, suggests that the initial rapid expansion may have outpaced the franchisor's ability to provide adequate support, contributing to the current systemic issues. This history poses a significant risk to the stability of the entire franchise system.

Potential Mitigations

• Question the franchisor on how its support infrastructure has been managed through these periods of rapid growth and subsequent contraction.
• A business advisor can help you assess if the franchisor currently has the resources and stability to support its remaining franchisees effectively.
• A review of the franchisor's financials with your accountant is essential to determine if it has recovered from the strain of this growth pattern.

Explanation

The franchisor explicitly discloses that it has a "Short Operating History," having been formed in June 2021 and begun franchising in 2022. This limited track record, combined with the severe financial weakness and extremely high franchisee turnover disclosed elsewhere in the FDD, makes this a significantly riskier investment than a well-established system. An unproven system carries higher risks of operational challenges, inadequate support, and potential business model failure, all of which appear to be present here.

Potential Mitigations

• Your attorney must carefully evaluate the explicit "Short Operating History" risk disclosure and its implications.
• Given the high risk, consulting with a business advisor to assess the viability of the business model is critical.
• Speaking with the longest-operating franchisees from the list in Exhibit D can provide insight into the system's evolution and challenges.

Explanation

The franchisor is part of Phoenix Franchise Brands, a holding company for multiple franchise systems, managed by the same key principals. This structure, combined with poor financial performance at Door Renew and significant litigation involving principals across affiliated brands (like Spray Foam Genie and Fetch! Pet Care), suggests a pattern. Decisions may prioritize the holding company's portfolio-level goals over the health of an individual brand, creating risks of diverted resources or aggressive tactics to extract value.

Potential Mitigations

• Your attorney should review the disclosures related to all affiliated brands and the litigation involving the common principals.
• A business advisor can help research the track record of Phoenix Franchise Brands and its management across their entire portfolio.
• In discussions with current franchisees, it is important to ask about any impacts from being part of a larger multi-brand company.

Explanation

A significant pattern of litigation involving the franchisor's principals and affiliated companies is disclosed. This includes a default judgment against Door Renew itself, and multiple pending lawsuits and arbitrations against other brands run by the same principals. Allegations include fraud, misrepresentation of financial performance, and breach of contract. This pattern across the brand portfolio is a major red flag, suggesting potential systemic issues with sales practices, operational support, and relationship management that could affect you.

Potential Mitigations

• Your attorney must conduct a thorough review of every piece of litigation disclosed in Item 3 to understand the nature of the allegations.
• Given the serious allegations of fraud and misrepresentation in related-party lawsuits, extreme caution is warranted.
• It is crucial to discuss these litigation patterns with your business advisor to assess the overall risk to your investment.