Explanation

The franchisor’s audited 2023 financial statements reveal significant financial weakness. They show a net loss of nearly $1 million and a negative members' equity (deficit) of over $1.2 million. This condition, which is also flagged as a 'Special Risk' in the FDD, may raise questions about the franchisor's ability to provide long-term support, invest in the brand, and fulfill its obligations without relying on new franchise fees, which can be an unsustainable model.

Potential Mitigations

• Your accountant must conduct a thorough review of the audited financial statements, including all footnotes and the auditor's report, to assess the company's viability.
• Discuss the franchisor's plan to achieve profitability and rectify its negative equity position with your business advisor.
• Understanding the implications of the state-required financial assurances (like surety bonds) mentioned in the addenda is a key discussion for your attorney.

Explanation

Item 20 data reveals extremely rapid growth, expanding from 1 franchised unit at the start of 2022 to 95 by the end of 2023, with projections for hundreds more. This explosive expansion, combined with the financial weaknesses shown in Item 21, suggests the franchisor's support infrastructure could be severely strained. You may face delays or inadequate assistance in training, site selection, and ongoing operational support as the franchisor struggles to keep pace.

Potential Mitigations

• Inquire directly with the franchisor about their specific plans and resources for scaling their support staff and systems to match this growth.
• A discussion with your business advisor about the sustainability of this growth rate would be prudent.
• It is vital to speak with franchisees who have opened recently to gauge the current quality and responsiveness of the support they received.

Explanation

Hangry Joe's Franchising, LLC was formed in June 2021 and began franchising in July 2021. As a very new franchise system, it has a limited operating history and track record. This presents a higher level of risk compared to a mature system, as its business model, support structures, and brand recognition are not yet fully proven over time. The franchisor also discloses it has not operated a business of the type being franchised.

Potential Mitigations

• A thorough investigation of the management team's prior experience in both the restaurant industry and franchising is essential; your business advisor can assist.
• Contacting the earliest franchisees from the list in Item 20 to discuss their experiences is a crucial due diligence step.
• Your accountant should help you assess whether the franchisor is adequately capitalized to support its growth and overcome early-stage challenges.

Explanation

While some key executives, like CEO Derek Cha, have experience with other franchise brands, this experience includes past litigation that presents its own risks. As disclosed in Item 3, Mr. Cha and a prior franchise system were sued by franchisees for serious allegations including violations of franchise law and making fraudulent financial performance representations. This history, combined with the newness of the Hangry Joe's system, presents a notable risk regarding management's track record.

Potential Mitigations

• Your attorney should carefully analyze the disclosed litigation history in Item 3 and discuss its implications for your investment.
• It is critical to speak with current Hangry Joe's franchisees about the quality and nature of their interactions with the management team.
• A business advisor can help you assess whether the management team's overall experience is sufficient to navigate the brand's rapid growth.

Explanation

While Item 3 does not disclose litigation against Hangry Joe's itself, it does disclose two past lawsuits against a different franchise system (sweetFrog) and its CEO, Derek Cha, who is also the CEO of Hangry Joe's. The allegations were serious, including claims of violating franchise law and making fraudulent pre-sale financial representations. Although settled, this history concerning the same principal executive represents a significant risk and a pattern of franchisee-initiated legal disputes.

Potential Mitigations

• Your attorney must carefully review the details of the disclosed past litigation involving the franchisor's CEO to understand the potential risks.
• It is advisable to have your attorney conduct independent searches for any other litigation involving the franchisor or its principals.
• Discussing these past issues with the franchisor and asking how they have changed their practices is a reasonable due diligence step.