Explanation

The FDD explicitly flags "Financial Condition" and a "Going Concern" notice from auditors as special risks. Exhibit E's audited financials show significant, multi-year operating losses and a historical members' deficit, raising substantial doubt about Ellie Fam LLC's ability to provide ongoing support or even remain in business without continued cash infusions. This financial weakness, despite recent capital contributions, poses a direct threat to the stability of the entire system and your investment.

Potential Mitigations

• Your accountant must perform a detailed analysis of the audited financial statements, focusing on the going concern note, cash flow, and reliance on franchise fees for revenue.
• It is crucial for your franchise attorney to evaluate any state-mandated financial assurances, like bonds or fee deferrals, required due to this condition.
• Discussing the franchisor's financial health and its impact on support with a wide range of current franchisees is a critical due diligence step.

Explanation

Item 20 data reveals that 18 franchised clinics were terminated or ceased operations in 2024. This represents a churn rate of nearly 10% of the clinics that started the year. Item 19 also explicitly notes these 18 closed clinics were excluded from the performance data. Such a high franchisee exit rate in a very young system is a critical indicator of potential systemic problems, such as unprofitability or franchisee dissatisfaction, posing a high risk.

Potential Mitigations

• Your attorney should guide you in contacting a significant number of former franchisees from the list in Exhibit D to understand their reasons for leaving.
• An accountant's analysis of the turnover rate in conjunction with the franchisor's rapid growth and financial condition is essential.
• A business advisor can help you weigh the risks suggested by this high turnover rate against the potential of the franchise.

Explanation

The franchise system has grown from zero to 240 franchised units in just three years, as shown in Item 20. This explosive growth, combined with the franchisor's disclosed financial instability, high franchisee turnover, and significant litigation, suggests its support infrastructure is severely strained. A special risk of

Potential Mitigations

• Engaging a business advisor to question the franchisor's management about their specific plans and resource allocation for scaling support systems is vital.
• A thorough due diligence process should involve speaking with franchisees who opened recently about the quality and timeliness of the support they received.
• Your attorney should help you scrutinize the support obligations detailed in Item 11 and the Franchise Agreement for any lack of specific commitments.

Explanation

Ellie Fam LLC began franchising in mid-2021, making this a very new and relatively unproven system. While an affiliate has operated clinics longer, the franchise model's long-term viability, brand recognition, and support systems are not well-established. This newness, combined with disclosed financial instability and high franchisee turnover, presents a significant risk that the business model may not be sustainable for franchisees, making this a high-risk venture.

Potential Mitigations

• Your business advisor should assist in conducting extensive due diligence on the founders' and management's direct experience in successfully managing a franchise system.
• Consulting with your accountant is essential to critically assess the franchisor's capitalization and its heavy reliance on franchise fees versus ongoing royalties for revenue.
• It is important to speak with some of the very first franchisees from the list in Exhibit D about their experiences with the developing system.

Explanation

Item 3 discloses a clear and concerning pattern of litigation. This includes multiple pending claims filed by franchisees alleging misrepresentation regarding critical services like EHR systems, billing, and credentialing. Furthermore, in a separate case, former franchisees filed counterclaims alleging fraud and franchise law violations. This pattern of serious disputes suggests significant systemic problems with the franchisor's service delivery and franchisee satisfaction, posing a high risk to your investment.

Potential Mitigations

• A thorough review of the specific allegations in each case described in Item 3 with your franchise attorney is absolutely essential.
• It is critical that you attempt to contact the franchisees involved in this litigation, with guidance from your attorney, to understand their perspective.
• Your accountant should factor the potential failure of franchisor-provided services, like billing, into your financial projections and contingency planning.