Explanation

The 2024 audited financial statements show a net loss of over $1.8 million and a members' deficit of over $1.7 million. A special risk factor explicitly states the franchisor's financial condition calls its ability to provide services and support into question. While a majority member has committed to provide funding through May 2026, this significant instability poses a substantial risk to the franchisor's long-term viability and ability to support you.

Potential Mitigations

• Your accountant must conduct a thorough analysis of the financial statements, including the nature of the member contributions and the viability of continued support.
• It is crucial to discuss with your attorney the implications of the disclosed financial weakness and the enforceability of the funding commitment.
• A business advisor can help you assess if the franchise system has the resources to grow and provide promised support despite its financial state.

Explanation

Item 20 data reveals significant franchisee turnover. In 2024, the system experienced a net decrease of 30 outlets, starting with 116 and ending with 86. This was driven by 48 terminations and cessations of operation, against only 18 new openings. This high rate of outlets leaving the system could indicate systemic problems, such as franchisee unprofitability, dissatisfaction with the model, or poor franchisor support, presenting a major risk to your potential success.

Potential Mitigations

• It is imperative to contact a significant number of former franchisees from the list provided in Exhibit I to understand their reasons for leaving the system.
• Your accountant should analyze the turnover rates in Item 20 over the past three years to assess any trends.
• Discuss the high turnover rates directly with the franchisor and ask for specific, verifiable explanations for the large number of terminations and cessations.

Explanation

The franchisor has been franchising since January 2022 and has experienced very rapid growth, expanding from 29 to 116 outlets in 2023 before contracting in 2024. Such rapid expansion, especially for a new franchisor with a limited history, can strain resources. This may impact the quality and availability of training, operational support, and other assistance you will rely on, which is a significant risk given the high franchisee turnover.

Potential Mitigations

• In discussions with current franchisees, you should specifically inquire about the quality and consistency of franchisor support during this period of rapid change.
• Your business advisor can help you evaluate whether the franchisor's infrastructure, as described in Item 11, appears adequate to support its franchisee base.
• Scrutinizing the franchisor's financial statements with your accountant is important to assess if they have allocated sufficient resources for robust franchisee support.

Explanation

The franchisor, HPB Foam LLC (HPB Foam), began franchising in January 2022 and explicitly discloses a "Short Operating History" as a special risk. A new system carries inherent risks, including an unproven business model, undeveloped support systems, and minimal brand recognition. The high franchisee turnover disclosed in Item 20 and the financial instability in Item 21 amplify the risks associated with investing in a young and unproven franchise concept.

Potential Mitigations

• A comprehensive due diligence process, guided by your business advisor, is critical to vet the long-term viability of this new system.
• Speaking with the earliest-joining franchisees is essential to understand how the system and support have evolved since inception.
• Your attorney should help you understand the heightened risks of a new system and consider negotiating more protective terms.

Explanation

The franchisor, HPB Foam, discloses that its parent company is JEZ Investments LLC and that an affiliate, SVHB Marketing LLC, employs all individuals who perform services for the company. While parent and affiliate financials are not provided, the extensive operational and financial reliance on these affiliates, which is detailed throughout the FDD, creates a complex structure that could obscure a full picture of the system's overall financial health and operational dependencies.

Potential Mitigations

• Your attorney and accountant must carefully analyze the relationships and dependencies between the franchisor and all its parent and affiliate entities.
• It is critical to understand which entity holds which obligations and assets.
• In discussions with the franchisor, you should seek clarity on the financial stability and long-term commitment of the parent and key affiliates.

Explanation

Item 3 discloses pending litigation initiated by a current iFoam franchisee against HPB Foam and its parent/affiliates. The claims include serious allegations such as fraud, intentional misrepresentation, negligent misrepresentation, and breach of contract. Another lawsuit with similar claims against an affiliate franchisor is also disclosed. This pattern of litigation alleging misrepresentation in the sales process is a significant red flag about the franchisor's practices and system health.

Potential Mitigations

• Your attorney must conduct a thorough review of the specific allegations, status, and potential implications of the lawsuits disclosed in Item 3.
• A discussion with your attorney is critical to understand the risks posed by a pattern of franchisee litigation involving claims of fraud.
• This disclosure should prompt heightened scrutiny and extensive due diligence, including speaking with other franchisees about their experiences.