Explanation

The franchisor explicitly warns that its financial condition “calls into question” its ability to provide support. Audited financial statements in Exhibit F confirm this, showing a members' deficit (negative net worth) of ($71,223) in 2023, worsening to ($93,243) in 2024. The company has a history of net losses and has been required by the Illinois Attorney General to post a surety bond. This presents a significant risk to the franchisor's long-term viability and support capabilities.

Potential Mitigations

• A franchise accountant should meticulously review the audited financials, including footnotes and cash flow statements, to assess the company's stability.
• It is crucial to ask the franchisor about its plans to address the negative net worth and its reliance on the surety bond.
• Your attorney should explain the protections, and limitations, offered by the state-required surety bond.

Explanation

Item 20 data reveals two franchisee terminations in 2024. Based on the nine franchised outlets operating at the start of that year, this represents a termination rate of over 20%. For a young system, this level of turnover is a significant concern and may indicate potential issues with the business model, franchisee satisfaction, or franchisor support. Exhibit E also lists three franchisees who left the system before opening, which could signal challenges in the pre-opening phase.

Potential Mitigations

• Engaging a business advisor to help you contact a significant number of current and former franchisees from the lists in Item 20 is essential for due diligence.
• Ask the franchisor for a detailed explanation of the circumstances surrounding each termination and non-opening.
• Your accountant can help you analyze the turnover data as a percentage of the total system size to gauge its potential impact.

Explanation

The franchise system is growing very quickly, expanding from zero to 12 franchised outlets in just three years according to Item 20. This rapid expansion, combined with the franchisor's disclosed financial instability and negative net worth detailed in Item 21, creates a substantial risk. The franchisor's resources may be strained, potentially compromising its ability to provide adequate site selection, training, and ongoing operational support to all of its new franchisees.

Potential Mitigations

• In discussions with current franchisees, specifically inquire about the quality and timeliness of the support they are receiving from the corporate office.
• A business advisor can help you question the franchisor about their infrastructure and staffing plans to support this continued rapid growth.
• Your accountant should review the financials to determine if the franchisor has the capital to sustain its growth and support obligations.

Explanation

This is a very new franchise system. GA Franchising, LLC was formed in late 2020 and began franchising in mid-2021. The first franchised outlets did not open until 2022. Item 1 states that neither the franchisor nor its affiliates have ever franchised any other concept. This lack of a long-term track record in franchising presents a higher-than-average risk regarding the viability of the business model, the effectiveness of its systems, and the quality of its support.

Potential Mitigations

• A business advisor can help you conduct extensive due diligence on the viability of the core business concept itself.
• It is vital to speak with the earliest franchisees listed in Item 20 to learn about their experiences with the developing system.
• Your attorney may be able to negotiate more franchisee-favorable terms in the agreement to compensate for the higher risk of investing in an unproven system.

Explanation

The franchisor is new to franchising. Item 1 states, “Neither our parent, nor our affiliates have ever franchised any concept and we have never offered franchises in any other line of business.” The management biographies in Item 2 do not list prior experience in managing a franchise system. While the founders have operated their own locations since 2015, a lack of direct franchising experience can present risks related to the quality of training, support, and system management.

Potential Mitigations

• A business advisor can help you assess whether the management team has hired experienced franchise professionals to compensate for their own lack of experience.
• It is important to ask current franchisees about the quality and effectiveness of the training and support provided by the management team.
• Your attorney should carefully review the franchisor's contractual support obligations outlined in the Franchise Agreement.