Explanation

The franchisor's audited financial statements contain a critical "Emphasis of Matter - Liquidity" note from the auditor. It highlights continued operating losses, negative cash flows, and a members' deficit of ($33,145) as of year-end 2024. The franchisor entity itself generated zero revenue in the last three years, relying entirely on owner contributions. This raises significant questions about its ability to support you or even remain solvent, representing a fundamental risk to your investment.

Potential Mitigations

• Your accountant must thoroughly review the financial statements, including the auditor's 'Emphasis of Matter' and all footnotes.
• Ask your attorney to assess the legal enforceability of the members' commitment to provide future funding mentioned in Note 4.
• A financial advisor can help you weigh the substantial risk of partnering with a financially weak franchisor against any potential rewards.

Explanation

Item 20 tables show that zero franchised outlets have opened or operated in the system's history. Therefore, there is no data on franchisee turnover, terminations, or non-renewals. While technically not a 'high turnover' risk, the complete absence of an operating franchisee base is itself a significant risk, indicating an unproven franchise system with no track record of franchisee success or sustainability. You would be among the very first to test the model.

Potential Mitigations

• A business advisor can help you assess the heightened risks of being one of the first franchisees in an unproven system.
• Your accountant should help you create conservative financial projections, as there is no historical franchisee data to rely upon.
• It is important to discuss with your attorney the potential lack of a support network and established best practices.

Explanation

The franchisor has no operating franchisees but projects opening four in the next fiscal year. While this indicates interest, growing from zero to several outlets quickly can strain a new franchisor's limited resources. Coupled with the financial weakness disclosed in Item 21, there is a risk that the franchisor may not have the capital or personnel to provide adequate training, site selection assistance, and opening support to all new franchisees simultaneously, potentially compromising your launch.

Potential Mitigations

• A business advisor should help you question the franchisor about their specific plans and resources for supporting this projected growth.
• In discussions with your attorney, you could seek to add specific performance milestones and support levels into your franchise agreement.
• Your accountant can review the franchisor's financial statements to assess if their capitalization can truly support this expansion.

Explanation

The franchisor entity was formed in 2021 and began offering franchises in 2022, with zero franchised outlets opened to date. The system is entirely unproven in a franchised context. Your investment depends on a new company with no track record of supporting franchisees, a developing operating manual, and minimal brand recognition outside of its two affiliate-owned locations. The franchisor's poor financial condition further elevates this risk, making it a highly speculative venture.

Potential Mitigations

• Your business advisor should help you conduct deep due diligence on the principals' ability to manage a franchise system, not just restaurants.
• A franchise attorney may be able to negotiate more favorable terms, such as lower initial fees or enhanced support obligations, to offset this higher risk.
• Engaging an accountant is critical to independently vet the business model's viability without a history of franchisee performance.

Explanation

Item 2 indicates the founders have operational experience running the two affiliate-owned Harlem Shake restaurants since 2012/2013. However, the franchisor entity was formed in 2021 and began offering franchises in 2022. This suggests extensive brand and restaurant management experience but very limited or no experience in managing a franchise system, supporting franchisees, or developing nationwide supply chains. This lack of specific franchising expertise is a significant risk for initial franchisees.

Potential Mitigations

• You should discuss with a business advisor the specific challenges of a franchisor transitioning from operator to supporter of other owners.
• When speaking with the franchisor, inquire about any experienced franchise professionals or consultants they have engaged to guide them.
• Your attorney can help you understand how this inexperience might affect the enforcement and support obligations in the franchise agreement.