Explanation

EverLine Franchising US, Inc. (EverLine) explicitly warns of its financial condition, a risk confirmed by state regulators who have imposed fee deferrals. The 2024 audited financial statements show a significant stockholders' deficit (negative net worth) of over $1.2 million and substantial, increasing net losses for the past three years. This financial weakness could seriously impair the franchisor's ability to provide promised support, invest in the brand, or even remain operational, jeopardizing your investment.

Potential Mitigations

• Your accountant must conduct a thorough analysis of the audited financial statements, including all footnotes, to assess the franchisor's solvency and operational viability.
• An attorney should be consulted to understand the implications of the state-mandated fee deferrals and the protections they may or may not offer.
• A business advisor can help you evaluate if the franchisor has a credible plan to achieve profitability and provide long-term support.

Explanation

The data in Item 20 reveals a high rate of franchisee exits in 2024, with approximately 14.5% of the outlets at the start of the year having been terminated or having ceased operations. This significant turnover is a critical warning sign and may indicate systemic problems such as franchisee unprofitability, dissatisfaction with franchisor support, or fundamental flaws in the business model. You could face similar challenges leading to the loss of your investment.

Potential Mitigations

• It is crucial to contact a significant number of the former franchisees listed in Exhibit E to understand the specific reasons for their departure.
• Your attorney can help you formulate key questions for both current and former franchisees regarding their profitability and relationship with the franchisor.
• A business advisor should help you analyze the potential root causes of this high turnover before you make any commitment.

Explanation

Item 20 data shows the system has grown from zero to 80 franchised outlets in just three years. This extremely rapid expansion, when viewed alongside the franchisor's significant net losses and negative net worth disclosed in Item 21, raises concerns. There is a risk that EverLine's support infrastructure has not kept pace with its growth, which could result in inadequate training, operational assistance, and quality control for you and other new franchisees.

Potential Mitigations

• With your business advisor, question the franchisor directly about its specific plans and capacity for scaling its support infrastructure to match this rapid unit growth.
• Engaging a broad range of existing franchisees, both new and established, to inquire about the current quality and responsiveness of franchisor support is essential.
• Your accountant should review the franchisor's financial statements in Item 21 to assess if it possesses the resources to sustain this growth.

Explanation

The franchisor explicitly discloses its short operating history as a special risk. Formed in late 2021, the company has a limited track record, and its financial statements show significant losses and negative equity. This lack of history and financial stability increases the risk of unproven systems, inadequate support, and potential business model failure compared to a more mature franchise. Your investment carries a higher degree of uncertainty due to the system's early stage of development.

Potential Mitigations

• A business advisor can help you conduct extensive due diligence on the founders' and management's direct experience in both the pavement services industry and in franchising.
• Speaking with the earliest franchisees from the Item 20 list is critical to understand their experiences and the evolution of the franchisor's support.
• Your accountant must carefully assess the franchisor's capitalization and its plan to achieve profitability.

Explanation

Item 2 lists the business experience of the management team. While some executives have experience with the Canadian affiliate, the U.S. franchising entity is very new, having been formed in late 2021. The franchisor's financial instability and high franchisee turnover may reflect challenges related to management's experience in successfully scaling and supporting a U.S. franchise network. This could impact the quality of operational guidance, training, and strategic direction you receive.

Potential Mitigations

• A thorough vetting of the management team's specific background in supporting a U.S.-based franchise system should be conducted with a business advisor.
• It is important to speak with existing U.S. franchisees about the quality of support and management's responsiveness.
• Your attorney can help you ask targeted questions about how the management team plans to address the company's financial and operational challenges.