Explanation

The franchisor, MTY Franchising USA, Inc. (MTY USA), reported a net loss of over $12.5 million for the fiscal year ended November 30, 2024, a significant downturn from a net income of nearly $17 million the prior year. The financial statements also show substantial impairment charges of over $44 million. The Maryland state addendum explicitly flags the franchisor's financial condition as a special risk, calling into question its ability to provide support, which is a significant concern for you.

Potential Mitigations

• A franchise accountant should meticulously analyze the audited financial statements, including all notes, to assess the franchisor's financial viability and its ability to support the system.
• It is crucial to discuss the implications of the net loss and high impairment charges with your financial advisor to understand the potential impact on your investment.
• Your franchise attorney should review the Maryland addendum's special risk notice and advise on its implications and any protections it may offer.

Explanation

The FDD confirms this is a new franchise system in the United States, with only one franchised unit in operation as of late 2024. The Operations Manual is disclosed as still being in the process of being updated. Investing in an unproven system carries higher risks, as the business model, brand recognition, and franchisor's support systems have not been tested over time in the U.S. market, which could affect your potential for success.

Potential Mitigations

• Conduct thorough due diligence with your business advisor, focusing on the franchisor’s experience with similar concepts in Canada and their specific U.S. market strategy.
• Having an accountant build conservative financial projections is crucial, given the lack of historical performance data for U.S. locations.
• Your attorney should advise on the risks of an unproven system and an incomplete Operations Manual.

Explanation

The franchisor is a subsidiary of MTY Food Group, Inc., a publicly-traded company that has grown by acquiring numerous franchise brands. This structure can present risks similar to private equity ownership, where decisions may prioritize short-term shareholder value over long-term franchisee health. The Franchise Agreement gives the franchisor the right to sell the system or merge with other companies without your consent, which could result in a change of ownership and business philosophy, potentially affecting your investment.

Potential Mitigations

• With your business advisor, research MTY Food Group's history and its management of other acquired brands.
• Your franchise attorney should explain the implications of the assignment clause, which allows the franchisor to sell the system without your approval.
• During due diligence calls, ask franchisees of other MTY-acquired brands how their relationship and support changed post-acquisition.

Explanation

Item 1 details a complex history of mergers and name changes for the franchisor entity. Furthermore, Item 3 discloses a significant amount of litigation involving various predecessor and affiliate brands that are now part of the MTY USA conglomerate. This history of litigation and corporate restructuring across the broader system could indicate unresolved issues or a corporate culture that may be a concern for a new franchisee joining one of its brands.

Potential Mitigations

• A franchise attorney should carefully analyze the history of the franchisor's parent and predecessor companies as detailed in Items 1, 3, and 4.
• Discuss the nature of past litigation involving other brands with your attorney to identify any recurring themes or potential red flags.
• In your due diligence, ask the franchisor how the experiences with predecessor brands have informed the current support structure for La Diperie.

Explanation

Item 3 discloses a significant and extensive history of litigation against the franchisor's affiliates and predecessors. Multiple franchisee groups have filed lawsuits alleging serious claims like fraud and misrepresentation, particularly concerning financial performance representations for other brands. The franchisor and its affiliates have also been subject to multiple administrative actions by state regulators for disclosure and registration violations. This pattern suggests a higher-than-average level of disputes within the larger MTY system.

Potential Mitigations

• Your franchise attorney must carefully review every litigation summary in Item 3 to understand the nature, frequency, and outcomes of these disputes.
• Treating this pattern of litigation as a significant red flag, you should discuss the potential risks to your own investment with your attorney.
• Consider that this history may indicate potential challenges in the franchisor-franchisee relationship and proceed with caution.