Explanation

LASHKIND Franchise, Inc. (LASHKIND) explicitly flags its own financial condition as a special risk. The financial statements in Exhibit C show a new company with no operating revenue, a net loss of over $121,000 for 2023, and financial survival dependent on loans from related parties. This financial weakness calls into question LASHKIND's ability to provide long-term support, grow the brand, or even remain in business, creating a significant risk for your investment.

Potential Mitigations

• A thorough review of the franchisor's financials, including all footnotes and the unaudited interim statements, with your accountant is essential to assess its viability.
• Your attorney should investigate if any financial assurances, such as a performance bond or escrow of fees, are required by state law due to this financial weakness.
• Discuss the parent company's commitment and financial capacity to continue funding LASHKIND with your business advisor.

Explanation

In 2023, the franchise system had two units reacquired by the franchisor out of a starting base of 12 franchised locations. This represents a 16.7% turnover rate in a single category. While not classified as terminations, a high rate of franchisor reacquisitions in a small, new system can be an indicator of potential franchisee distress or systemic problems, which may not be immediately apparent. This level of churn warrants significant investigation into the reasons for these departures.

Potential Mitigations

• It is critical to contact the former franchisees listed in Exhibit H to understand the circumstances that led to them leaving the system; your attorney can help prepare questions.
• Discussing the high reacquisition rate directly with the franchisor may provide additional context.
• Your business advisor can help you assess if this turnover rate signals underlying issues with the business model's profitability or the franchisor's support.

Explanation

The franchisor is a new entity that began franchising in 2023 and has grown to 14 outlets (12 franchised) within its first year. The FDD projects continued growth with several agreements already signed. For a new company with limited financial resources and operating losses, such rapid expansion could potentially strain its ability to provide the necessary high-quality training, site selection assistance, and ongoing operational support to all franchisees, including you.

Potential Mitigations

• Asking the franchisor about their specific plans to scale support staff and infrastructure to match the pace of growth is an important step.
• Inquiries with the most recent franchisees to open can give you a sense of the current level of support being provided.
• A business advisor can help you evaluate whether the franchisor's management team has the experience to handle this rate of expansion.

Explanation

LASHKIND is an early-stage company, having been incorporated in late 2022 and only starting to offer franchises in March 2023. The FDD explicitly discloses its "Short Operating History" as a special risk. As a new system, its business model, support infrastructure, and brand recognition are not yet proven over time. Investing in such a new system carries a higher level of risk regarding its long-term viability and potential for success compared to a more established brand.

Potential Mitigations

• Extensive due diligence is required, including speaking with the earliest franchisees listed in Item 20 about their experience and the franchisor's performance.
• Your accountant should carefully scrutinize the startup financials and business plan to assess the system's capitalization and pathway to profitability.
• Engaging a business advisor to evaluate the long-term sustainability of the concept is a prudent measure.

Explanation

Item 1 discloses that the franchisor's parent company is majority-owned by NSF Blo, LLC, and a director from NewSpring Capital sits on the board. This structure suggests ownership by a private equity or similar investment firm. Such firms often have a specific investment timeline and may prioritize maximizing short-term returns. This could potentially lead to decisions, such as increasing fees or reducing support costs, that may not align with the long-term health of the franchisees' businesses.

Potential Mitigations

• Researching the investment firm's reputation and track record with other franchise brands they have owned can be very insightful.
• Engaging a business advisor can help you assess how this ownership structure might influence the franchisor's strategy and support levels.
• It is crucial to ask current franchisees about any changes they have experienced since the investment firm became involved.

Explanation

While LASHKIND discloses its parent company, Blo Holdings, it does not provide the parent's financial statements. The FDD shows LASHKIND is a newly formed entity that is entirely dependent on its parent/affiliates for funding, as shown by the large "Due to Related Parties" liability on its balance sheet. Without the parent's financials, you cannot fully assess the financial stability of the entity that is keeping your franchisor afloat, which is a significant information gap and risk.

Potential Mitigations

• Your accountant should analyze the franchisor's dependency on its parent company and the risks this poses.
• It is advisable for your attorney to request the parent company's financial statements to get a complete picture of the enterprise's health.
• Understanding if the parent company has formally guaranteed the franchisor's obligations is a critical question for your attorney to investigate.