Explanation

Magnuson Franchising, LLC (Magnuson LLC) explicitly warns in its 'Special Risks' section that its financial condition calls its ability to provide support into question. This is reinforced by multiple state regulators requiring Magnuson LLC to defer collecting initial fees due to its financial condition. The audited financial statements show very low member's equity ($24,835 as of year-end 2024), indicating limited capital to support the system, invest in the brand, or withstand financial setbacks.

Potential Mitigations

• A franchise accountant must perform a thorough analysis of the audited financial statements, including footnotes and cash flow trends.
• It is crucial to ask your attorney about the specific protections offered by any state-mandated fee deferrals or financial assurances.
• Discuss the franchisor’s capitalization and its ability to fund its support obligations with your financial advisor.

Explanation

Item 20 data and accompanying exhibits appear to show a high rate of franchisee churn for a small, young system. Exhibit E-2 lists two franchisees who left the system during the most recent fiscal year out of a starting base of nine, representing a turnover rate of over 20%. One of these was a termination that occurred before the hotel opened. This level of turnover may indicate issues with the business model, franchisee satisfaction, or support.

Potential Mitigations

• Your attorney should help you formulate questions for the franchisor regarding the specific circumstances of each franchisee departure.
• Contacting a significant number of current and former franchisees from the lists in Item 20 is essential to understand their experiences.
• Work with your accountant to analyze the turnover rates over the three years provided and discuss the potential implications for system stability.

Explanation

Magnuson LLC explicitly discloses this risk, stating in the 'Special Risks' section that it is 'at an early stage of development and have a limited operating history.' Having only started franchising in January 2022, the system is very young with a small number of operating units. This lack of a long track record means the business model's long-term viability, brand recognition, and operational systems are not yet fully proven, which could increase your investment risk.

Potential Mitigations

• Conducting extensive due diligence on the backgrounds of the management team is a critical task for you and your business advisor.
• It is vital to speak with the earliest franchisees listed in Item 20 to understand the system's evolution and challenges.
• An attorney could help you negotiate more franchisee-favorable terms to compensate for the higher risk of an unproven system.

Explanation

Item 1 states that neither Magnuson LLC nor its parent company has ever operated a Branded Hotel. Item 2 shows management has experience in the hotel industry and with the Magnuson brand, but it appears to be primarily in marketing and management services, not in owning or operating franchised hotels. This lack of direct franchising and operational experience could pose a risk, as they may be less equipped to provide practical, effective support and guidance to franchisees.

Potential Mitigations

• A thorough investigation of the management team's specific experience in franchising, not just the hotel industry, should be conducted with a business advisor.
• In discussions with existing franchisees, focus on the quality and practicality of the operational support they receive.
• Your attorney can help you question the franchisor about what outside expertise, such as franchise consultants, they have engaged.

Explanation

The franchisor, Magnuson LLC, is a wholly-owned subsidiary of Magnuson Company, L.L.C., which owns all the intellectual property and provides key services. Given that Magnuson LLC is a new entity with disclosed financial weakness, the financial health of its parent is material to understanding the stability of the entire system. However, the parent company's financial statements are not included in the FDD, which could obscure a complete view of the enterprise's financial backing.

Potential Mitigations

• Your accountant should carefully assess the franchisor's financials in light of the absence of parent company data.
• It is important to ask your attorney whether, given the franchisor's dependency and financial state, parent financials should have been provided.
• You should request the parent company's financial statements from the franchisor to get a complete picture of the system's stability.

Explanation

Item 3 discloses a significant regulatory action against the franchisor's parent company, Magnuson Company, L.L.C. In 2020, the State of Washington found the parent had engaged in the sale of franchises without providing disclosure documents or being registered. While this is a single action and not a pattern of franchisee lawsuits, it is a very serious issue, as it involves illegal franchise sales by the ownership entity. This raises significant concerns about the compliance culture of the organization.

Potential Mitigations

• A franchise attorney must review the consent order in Item 3 and explain its full implications for you.
• It is critical to ask the franchisor what specific changes in personnel and compliance procedures have been made since this event.
• Your attorney should verify that the franchisor is currently in good standing with all relevant state franchise regulators.