Explanation

The parent company's audited financials show significant and recurring net losses for the past three fiscal years, including a ($13M) loss in 2024. Furthermore, over $30 million in long-term debt matures in 2025, with renewal only being an expectation, not a certainty. This financial weakness poses a substantial risk to the franchisor's ability to support the system and fulfill its obligations, potentially jeopardizing your investment. The provided parent guarantee offers little comfort as the guarantor is the entity with these financial issues.

Potential Mitigations

• Your accountant must conduct a deep analysis of the provided financial statements, including all footnotes and the auditor's report, to assess solvency and operational viability.
• A franchise attorney should review the parent company guarantee and advise on its practical value given the parent's financial condition.
• In discussions with the franchisor, your business advisor can help you probe for specific details about their plan to address the recurring losses and upcoming debt maturity.

Explanation

Item 20 data reveals a pattern of high franchisee turnover. In 2023, the system experienced a 33% termination rate based on the number of units at the start of the year, followed by a 40% rate in 2024. Such high rates of franchisees leaving the system are a critical warning sign and may indicate systemic problems, such as franchisee unprofitability, dissatisfaction with the business model, or inadequate support, presenting a significant risk to your potential success.

Potential Mitigations

• It is crucial to contact a significant number of the current and former franchisees listed in Item 20 to understand the reasons for this high turnover rate.
• Your franchise attorney can help you formulate specific questions regarding profitability, support, and the reasons franchisees have left the system.
• A business advisor can assist in analyzing whether the high turnover rate points to fundamental flaws in the business model or operational execution.

Explanation

The franchise system is expanding very quickly, nearly tripling its number of franchised units in the most recent year, from 5 to 14. When combined with the franchisor's significant, ongoing financial losses and high franchisee turnover rates, this rapid growth suggests that the company's support infrastructure could be severely strained. You may face risks of receiving inadequate or delayed training, site selection assistance, and ongoing operational support as the franchisor struggles to keep pace with its growth.

Potential Mitigations

• You should question the franchisor about their specific plans and resource allocation for scaling their support staff and systems to match franchise growth.
• Engaging a business advisor to evaluate the franchisor's operational capacity in light of its rapid expansion is a prudent step.
• Contacting franchisees who opened recently can provide insight into the current quality and responsiveness of the support system.

Explanation

The franchisor, PHP Franchise, LLC (PHP Franchise), was formed in October 2021 and only began offering franchises in November 2021, as stated in Item 1 and highlighted in the 'Special Risks' section. This limited operating history means the business model is relatively unproven in a franchise context, brand recognition is likely minimal, and the support systems may be underdeveloped. Investing in such a new system carries a higher risk of unforeseen challenges and potential instability compared to a more established brand.

Potential Mitigations

• With your business advisor, conduct extensive due diligence on the backgrounds of the management team to assess their prior experience in both the HVAC industry and in managing franchise systems.
• It is vital to speak with the earliest franchisees in the system to gauge the franchisor's performance and support during its initial growth phase.
• Your accountant should carefully review the franchisor's financials to assess if it is adequately capitalized to sustain a new, growing system.

Explanation

Item 1 discloses that the franchisor is part of a portfolio owned by The Riverside Company, a private equity (PE) firm. PE ownership can introduce risks, as decisions may prioritize rapid growth and short-term investor returns over the long-term health of franchisees. This could manifest as reduced support to cut costs, pressure to use specific vendors, or a sale of the entire system, potentially to a new owner with a different philosophy or less experience in franchising.

Potential Mitigations

• Your business advisor can help you research the private equity firm’s reputation and track record with its other franchise concepts.
• It is important to ask current franchisees about any changes in fees, support, or strategic direction since the PE firm's involvement began.
• Your attorney should analyze the Franchise Agreement for clauses that permit the franchisor to easily sell or assign the system, and explain the implications for you.