Explanation

The franchisor's financial statements in Item 21 show net losses for all three years of its operation (2022-2024) and a declining, low members' equity of only $13,027 in 2024. This financial weakness is explicitly flagged as a risk in the Virginia state addendum. Such financial strain may impact the franchisor's ability to provide support, invest in the brand, or even remain solvent, creating a significant risk to your investment.

Potential Mitigations

• A thorough review of the franchisor's financial statements and auditor's notes with your accountant is essential to assess its long-term viability.
• Your attorney should analyze any state-mandated financial assurance requirements, such as bonds or escrow, that may offer you limited protection.
• Ask the franchisor directly about their plans to achieve profitability and how they will fund ongoing franchisee support, with guidance from your business advisor.

Explanation

The FDD contains a direct and material contradiction regarding franchisee turnover. Item 20's data tables report zero terminations, cancellations, or ceased operations for 2024. However, FDD Exhibit G explicitly lists one franchisee with three units as having terminated or ceased doing business during that same period. This discrepancy raises serious concerns about the accuracy and reliability of the franchisor's disclosures and may conceal potential franchisee distress or system-wide problems.

Potential Mitigations

• Your attorney must address this significant discrepancy with the franchisor and demand a written explanation and a corrected FDD.
• It is critical to contact the former franchisee listed in Exhibit G to understand the reasons for their departure; your attorney can help frame questions.
• Treat this contradiction as a major red flag concerning the franchisor's transparency and reporting accuracy when evaluating the investment with your advisors.

Explanation

The franchise system expanded from zero to 30 franchised outlets in a single year (2024), as shown in Item 20. This rate of growth is exceptionally rapid. When combined with the franchisor's weak financial position disclosed in Item 21, there is a substantial risk that its support infrastructure, including training and operational assistance, may be unable to keep pace with the needs of its new franchisees.

Potential Mitigations

• In discussions with the franchisor, question their specific plans for scaling support staff and systems to match the rapid unit growth.
• Contact a wide range of the new franchisees listed in Exhibit F to inquire about the current quality and responsiveness of the support they are receiving.
• Your accountant should evaluate whether the franchisor's financial resources, as shown in Item 21, appear sufficient to support such a fast-growing network.

Explanation

The franchisor, Exit Factor, LLC, is a new company that was formed in May 2022 and only began offering franchises in September 2023. As shown in Item 20 and Item 21, the system has a very limited operational history and has not yet achieved profitability. Investing in such a new and unproven system carries a higher risk of business model flaws, inadequate support systems, and potential franchisor failure compared to more established brands.

Potential Mitigations

• A business advisor can help you conduct extensive due diligence on the founders' specific experience in this industry and in managing a franchise system.
• Speaking with the earliest franchisees is critical to understand their experience with the developing systems and support.
• Your attorney may be able to negotiate more franchisee-favorable terms to help offset the higher risk associated with an unproven system.

Explanation

While Exit Factor, LLC itself has no litigation history, Item 3 discloses that its affiliates (TGG, GCZ) and parent organization (UFG) have recent (2021-2022) consent orders with the State of California for alleged violations including illegal franchise sales and improper financial representations. This pattern of regulatory issues within the franchisor's affiliated group could suggest a higher-risk compliance culture that may affect how Exit Factor operates.

Potential Mitigations

• Your attorney must review the details of the affiliate litigation in Item 3 to understand the nature and severity of the allegations.
• Ask the franchisor what specific changes in compliance and sales training have been implemented across the entire UFG network in response to these orders.
• Discussing the overall corporate culture with a range of franchisees from different UFG brands, if possible, could provide valuable insight.