Explanation

The franchisor, Network In Action Intl. LLC (NIA), explicitly discloses its precarious financial condition as a special risk. Audited financial statements in Item 21 confirm this, showing a significant and growing members' equity deficit (-$1.38M in 2024) and operating losses for the past two years. This financial weakness may call into question NIA's ability to provide long-term support, invest in the brand, and fulfill its obligations to you.

Potential Mitigations

• An experienced franchise accountant must thoroughly review the audited financial statements, including all footnotes, to assess the franchisor's viability.
• Discuss with your accountant the implications of the growing deficit and operating losses on the company's long-term health.
• Your attorney should investigate if any financial assurances, like bonds or escrow, are required by your state due to this financial weakness.

Explanation

Item 20 data reveals a concerningly high rate of franchisee turnover. In 2024, 25 franchises either were terminated or ceased operations, out of 117 at the start of the year. This represents a churn rate of over 21%, which may indicate systemic problems such as franchisee unprofitability, dissatisfaction with the franchisor's support or business model, or other significant challenges within the system that could affect your potential for success.

Potential Mitigations

• It is critical to contact a significant number of former franchisees listed in Exhibit F to understand their reasons for leaving the system.
• Your business advisor can help you analyze the turnover data against industry benchmarks to gauge its severity.
• Consult your attorney to discuss the potential implications of this high churn rate on your investment.

Explanation

While NIA was formed in 2015 and began franchising in 2016, giving it several years of history, it exhibits many characteristics of a higher-risk system. These include significant financial instability, very high franchisee turnover, and serious regulatory actions, as disclosed in Items 21, 20, and 3, respectively. These factors combined may present challenges similar to those of a newer, less-proven system, increasing your overall investment risk.

Potential Mitigations

• Conducting extensive due diligence on the founders' and management's experience with your business advisor is crucial.
• It is vital to speak to current and former franchisees about their experiences to gauge the maturity and effectiveness of the system's support.
• Your attorney and accountant should help you weigh the risks associated with the company's troubled history.

Explanation

The two key managers, Scott Talley and Gerarda Sanchez, have been with the company since its inception in 2015. However, Item 3 discloses significant regulatory actions in Maryland and Washington for illegal franchise sales. The Washington order also alleged material misrepresentations by Mr. Talley. This history of non-compliance with franchise law raises questions about management's experience and competence in running a franchise system, which poses a risk to franchisees.

Potential Mitigations

• A thorough review of the management team's background, including the specific allegations in the regulatory actions, is critical with your attorney.
• It is important to speak with existing franchisees about the quality of management's support and their operational expertise.
• Your business advisor can help you assess whether the management team demonstrates the capabilities to lead the system effectively going forward.

Explanation

Item 3 discloses a pattern of significant legal and regulatory issues. NIA is in pending litigation with a major competitor, BNI, involving claims of trade secret misappropriation. More critically, NIA has concluded enforcement actions with Maryland and Washington for illegal franchise sales. The Washington Consent Order resulted in a five-year ban on selling franchises in that state and included allegations of material misrepresentations by management. This history indicates significant legal and compliance risks for the franchisor.

Potential Mitigations

• A thorough review of the details and implications of all disclosed litigation and regulatory actions with your franchise attorney is essential.
• You should ask your attorney to assess the potential impact of these legal issues on the franchisor's operations and reputation.
• Investigating the specific allegations in the Washington state consent order with legal counsel could provide critical insight into franchisor conduct.