Explanation

Item 20 data for U.S. franchises is limited, showing only one unit opened in 2024 with no closures or transfers. This lack of a domestic franchisee track record is itself a risk. However, the financial statements (Note 5) disclose significant international turnover, with 12 store closures in 2023. While not reflected in the U.S. tables, this international data could suggest potential systemic challenges that might eventually affect the domestic system as it grows.

Potential Mitigations

• It is critical to contact the one U.S. franchisee listed in Exhibit F to discuss their experience.
• In discussions with the franchisor, your business advisor should help you probe into the reasons for the high number of international closures.
• Given the limited U.S. history, your attorney should help you understand the risks associated with being an early domestic franchisee in this system.

Explanation

The franchisor is new to domestic franchising, with only one U.S. franchised unit operational as of year-end 2024. While the brand has history, rapid expansion into the U.S. franchise market could strain their support systems. A potential risk exists that the franchisor's infrastructure for training, site selection, and ongoing assistance may not be sufficiently scaled to handle a sudden influx of new franchisees, potentially leading to inadequate support for your business.

Potential Mitigations

• Inquire with the franchisor about their specific plans and resources allocated for supporting new U.S. franchisees.
• A discussion with your business advisor can help evaluate if the management team has the capacity to manage growth effectively.
• Your attorney could suggest negotiating for enhanced support commitments in your franchise agreement.

Explanation

Item 2 discloses that two members of the Board of Directors are executives with RSE Ventures. While not explicitly stated that RSE is a private equity firm, its role as a venture investment firm suggests a similar focus. This could mean business decisions are driven by investor return timelines rather than the long-term health of franchisees. This may manifest as pressure to cut support costs, increase fees, or focus on a rapid exit strategy.

Potential Mitigations

• Engaging a business advisor to research RSE Ventures and its track record with other consumer or food service brands is recommended.
• Your attorney should carefully review the franchisor's rights to sell or assign the franchise system.
• In discussions with existing franchisees, you should inquire about any changes in system philosophy or support since RSE's involvement.

Explanation

Magnolia LLC is a subsidiary of Magnolia Group Holdings, Inc. The FDD does not include financial statements for this parent company. While not always required, the franchisor's significant negative net worth makes the financial health of the parent highly relevant, as it may be the ultimate source of financial support. The absence of the parent's financials creates a blind spot in assessing the overall stability and resources backing your franchise investment.

Potential Mitigations

• Your attorney should inquire if the parent company will guarantee the franchisor's obligations under the Franchise Agreement.
• It is wise to ask the franchisor for the parent company's financial statements to get a complete picture of the enterprise's health.
• Your accountant can help you assess the risks of a subsidiary with negative equity operating without a formal financial guarantee from its parent.

Explanation

Item 3 discloses a concluded arbitration from 2017 where the franchisor paid a settlement of $349,000. More recently, Note 4 to the financial statements reveals a 2024 legal dispute with a former master licensee where Magnolia LLC was the plaintiff and received a settlement of $128,552. While not a pattern of franchisee-initiated fraud claims, this history of significant disputes with business partners could indicate potential for conflict in high-stakes relationships.

Potential Mitigations

• A thorough review of the litigation history in Item 3 and the financial statement footnotes with your attorney is important.
• A business advisor can help you assess if this history suggests a potentially litigious business culture.
• Speaking with current and former franchisees, where possible, can provide context on their relationship with the franchisor.