Explanation

The franchisor's audited financial statements reveal significant financial weakness. For the year ending December 31, 2024, Life Saver Franchising, Inc. (LSFI) reported a net loss of over $1 million and a total members' deficit (negative net worth) of over $1.3 million. This condition, also highlighted as a "Special Risk" by the franchisor, raises questions about its ability to support you and fulfill its obligations without relying on its affiliates or new franchise sales.

Potential Mitigations

• An experienced franchise accountant must thoroughly review the financial statements, including all footnotes and the large related-party payable.
• Inquire with your attorney about the protections offered by the state-mandated deferral of initial fees due to this financial condition.
• Ask the franchisor to provide the financial statements of its affiliate supplier, Life Saver Pool Fence Systems, Inc., for a complete picture.

Explanation

Item 20 data indicates potentially high franchisee turnover for a new system. In 2024, the system began with four franchised outlets and one ceased operations during the year. This represents a 25% churn rate of the initial base. For a young franchise system, such a high percentage of units leaving in a single year could be an indicator of potential systemic issues, franchisee dissatisfaction, or challenges with the business model that warrant further investigation.

Potential Mitigations

• Contacting the former franchisee listed in Exhibit L is critical to understanding their reasons for leaving the system.
• A discussion with your business advisor can help you analyze the potential impact of this turnover rate on system health.
• Ask the franchisor for a detailed explanation of the circumstances surrounding this franchisee's departure.

Explanation

The franchise system is growing rapidly in percentage terms, doubling from four to nine units in 2024. This rapid expansion, when viewed alongside the franchisor's significant reported financial losses, may suggest that the franchisor's resources could be strained. A risk exists that growth in franchise sales might outpace the company's ability to provide adequate and timely support, training, and other resources to all franchisees in the growing system.

Potential Mitigations

• Engaging a business advisor to assess the franchisor's support infrastructure relative to its growth rate is important.
• Question the franchisor directly about their plans and budget for scaling franchisee support services as the system expands.
• Discuss the current quality and responsiveness of franchisor support with a wide range of existing franchisees.

Explanation

The franchisor, LSFI, is a new and unproven franchise system, having been formed in late 2022 and starting to offer franchises in 2023. The FDD explicitly discloses "Short Operating History" as a special risk. Investing in a new system carries inherent risks, including the possibility of an unproven business model, underdeveloped support systems, and minimal brand recognition, all of which are compounded by the franchisor's disclosed financial weakness.

Potential Mitigations

• It is advisable to conduct extensive due diligence on the viability of the business model with help from your business advisor.
• Engage your accountant to perform a thorough analysis of the start-up financials and the business plan's feasibility.
• Your attorney can help you understand the heightened risks associated with investing in a new franchise system.

Explanation

While the franchisor's key personnel appear to have extensive experience in the pool fence industry through an affiliated company operating since 1991, their experience in managing a franchise system is very limited, beginning only in 2023. This lack of a long track record in franchising specifically can pose a risk, as the skills required to support franchisees may differ from those needed to run a non-franchised business.

Potential Mitigations

• In discussions with existing franchisees, specifically inquire about the quality and effectiveness of the franchise-specific support they receive.
• A business advisor can help you evaluate whether the management team's industry experience is likely to translate into effective franchise support.
• Clarify with the franchisor what outside franchise expertise, such as consultants or experienced staff, they have engaged.

Explanation

The franchisor, LSFI, is financially weak and dependent on an affiliate, Life Saver Pool Fence Systems, Inc., for both product supply and financial support via a large related-party loan. However, the financial statements for this critical affiliate are not provided in the FDD. This lack of disclosure creates a significant risk, as you cannot fully assess the financial stability of the entire enterprise upon which your business will depend.

Potential Mitigations

• Your attorney should request the financial statements of the affiliate, LSPF Inc., to allow for a complete due diligence review.
• An accountant should analyze the nature and terms of the inter-company debt to understand the full financial relationship.
• Understand that your success is tied to an entity whose financial health is currently unknown and should be considered a major risk.