Explanation

The franchisor's audited financial statements reveal a deeply concerning financial position. For the fiscal year ending June 30, 2024, the company had a net loss of over $1.4 million and a negative Member's Equity of over $2.7 million. This severe financial instability, acknowledged as a special risk in several state addenda, raises substantial doubt about the franchisor's ability to provide long-term support, invest in the brand, or even remain solvent, creating significant risk for you.

Potential Mitigations

• Your accountant must conduct a thorough review of the franchisor's financial statements, including footnotes and the trajectory of losses and negative equity over the past three years.
• Discuss the implications of the required surety bonds mentioned in state addenda with your franchise attorney to understand the limited protection they may offer.
• Inquire with a business advisor about the franchisor's plan to achieve profitability and financially support the system without relying solely on new franchise sales.

Explanation

The franchise system exhibits a high rate of franchisee turnover. In fiscal year 2024, a total of 8 outlets exited the system through terminations and franchisor reacquisitions, representing over 20% of the number of outlets at the start of the year. Such a high churn rate is a significant red flag, potentially indicating systemic problems, franchisee dissatisfaction, lack of profitability, or inadequate support, which could directly impact your chances of success.

Potential Mitigations

• It is critical to contact a significant number of former franchisees listed in Item 20 to understand the specific reasons for their departure.
• Your accountant should analyze the turnover data across all categories (terminations, reacquisitions, cessations) for the last three years to assess the overall health of the system.
• A franchise attorney can help you frame questions for the franchisor regarding the high turnover and why so many units have left the system.

Explanation

The system has grown from 8 to 70 franchised units in just two years. While growth can be positive, this rapid expansion, when coupled with the franchisor's significant operating losses and high franchisee turnover, suggests a high-risk scenario. The franchisor may be focused on generating cash from initial franchise fees rather than building the infrastructure needed to adequately support its growing number of franchisees, which could leave you without sufficient help or guidance.

Potential Mitigations

• A business advisor can help you question the franchisor about their specific plans and resource allocation for scaling franchisee support systems to match this rapid growth.
• Ask a significant number of recent and established franchisees about the current quality and responsiveness of the training and support they receive.
• Your accountant should evaluate whether the franchisor's financial condition can realistically sustain support for such a large and fast-growing network.

Explanation

Graze Craze Franchising, LLC (GCZ) began franchising in June 2021 and has a limited operating history, a fact noted as a special risk in some state addenda. This newness, combined with its significant financial instability and high franchisee turnover, presents a substantial risk. Unproven systems, underdeveloped support, and minimal brand recognition can increase the likelihood of business failure. You would be investing in a concept that has not yet demonstrated long-term viability or consistent franchisee success.

Potential Mitigations

• With a business advisor, perform extensive due diligence on the viability of the business model and the experience of the management team within this specific sector.
• Given the high risk, your attorney may be able to negotiate for more favorable terms, such as reduced fees or stronger performance guarantees.
• Contacting the earliest franchisees in the system is crucial to understand the evolution of the brand and the support provided since its inception.

Explanation

This risk is present and significant. Item 3 discloses that GCZ, along with its parent UFG and affiliate TGG, entered into a consent order with California in 2022 for allegedly offering franchises without registration and making improper financial performance representations. This recent regulatory action against the franchisor itself, combined with a history of similar issues among its affiliates, indicates a pattern of compliance problems that could affect the franchisor's operations and reputation.

Potential Mitigations

• Your franchise attorney must review the California consent order in detail to understand the specific violations and the required remedies, such as the independent monitor.
• Question the franchisor about the steps they have taken to ensure compliance with franchise sales laws since this order was issued.
• A business advisor can help assess the potential impact of this regulatory history on the brand's reputation and your investment.