Explanation

The franchisor, Home Frite Franchising, LLC (Home Frite), has a history of significant net losses and negative members' equity, as shown in its audited financial statements. The 2024 financials show a net loss of over $70,000 and negative equity over $186,000. An auditor's report explicitly raises 'substantial doubt about the Company's ability to continue as a going concern'. This financial weakness could severely impact its ability to support you.

Potential Mitigations

• A franchise accountant must analyze the franchisor's financial statements, including the 'going concern' note, to assess its viability.
• Discuss with your attorney the implications of the Illinois and Virginia state addenda, which impose financial assurance requirements due to this condition.
• Ask your business advisor to help you evaluate if the franchisor has sufficient capital to fund its obligations without relying on new franchise sales.

Explanation

As a new franchise system, there is no history of franchisee turnover to analyze. Item 20 tables show zero franchised outlets operating for the full three-year reporting period, with the first only opening in March 2025. While this means no negative turnover is present, it also signifies a lack of an established franchisee network to provide validation, indicating the risks associated with an unproven system.

Potential Mitigations

• Your business advisor should help you perform enhanced due diligence on the franchisor's company-owned operations and management experience.
• Engage a franchise attorney to discuss the risks of investing in a new system with no franchisee performance track record.
• Speaking with the very first franchisees listed in Exhibit E will be critical for obtaining any operational feedback.

Explanation

The franchisor is a new system projecting rapid growth, with plans for four new franchised outlets in the next fiscal year after having none previously. The company's financial statements in Item 21 show negative equity and a 'going concern' warning from the auditor. This combination suggests that the franchisor's support infrastructure may be strained or underdeveloped, potentially leading to inadequate assistance for new franchisees like you.

Potential Mitigations

• A business advisor can help you question the franchisor about their specific plans and budget for scaling up franchisee support staff and systems.
• Speaking with the first few franchisees listed in Exhibit E is crucial to gauge the initial quality of support they are receiving.
• Your accountant should review the financials to determine if the company has the resources to support its growth plans.

Explanation

Home Frite began franchising in late 2021 and, according to Item 20, had no operating franchised units at the end of 2024. This lack of a track record for the franchise system presents a significant risk. The business model, support systems, and brand recognition are largely unproven in a franchise context, which could increase your risk of business failure compared to joining a more established system.

Potential Mitigations

• A thorough investigation of the management team's prior industry and franchising experience is essential; a business advisor can assist.
• Your accountant must carefully review the franchisor's financial stability, especially given its startup nature.
• Speaking with the company-owned store management and the very first franchisees will provide the only available operational insights.

Explanation

The franchisor, Home Frite Franchising, LLC, is affiliated with Home Frite, LLC and Home Frite Dekalb, LLC. The franchisor itself has negative equity and relies heavily on loans from its affiliate, Home Frite, LLC, as shown in the financial statements. The FDD does not include the financial statements of these parent or affiliate companies, which hold the intellectual property and have a longer operating history. This makes a complete assessment of the entire enterprise's financial health difficult.

Potential Mitigations

• Your accountant should analyze the financial statements in Item 21, paying close attention to the significant related-party loans.
• It is advisable to have your attorney inquire about the financial health of the affiliate companies, as they are integral to the system's operation.
• A business advisor can help you assess the risks associated with a franchisor that is financially dependent on its affiliates.