Explanation

The franchisor explicitly warns that its financial condition “calls into question the Franchisor’s financial ability to provide services and support to you.” The audited financial statements in Exhibit G confirm this, showing negative working capital for 2024. This indicates a significant risk that the franchisor may be unable to meet its short-term obligations or adequately support your business, despite the fees you pay.

Potential Mitigations

• A franchise accountant should perform a deep analysis of the franchisor's financial statements, including footnotes and cash flow, to assess its viability.
• Discuss the practical implications of the franchisor's weak financial state and the explicit warning with your franchise attorney.
• Your business advisor should help you evaluate if the franchisor has sufficient resources to fulfill its support promises.

Explanation

Item 20 data reveals consistently high franchisee turnover. Analysis of the data for 2023 and 2024 shows annual churn rates from terminations and non-renewals of approximately 13% to 14%. Furthermore, Item 19 reveals nearly half the system (47%) generated no revenue in 2024. This level of churn and non-performance suggests significant, systemic problems with the business model, support, or franchisee profitability.

Potential Mitigations

• It is critical to contact a significant number of former franchisees listed in Item 20 to understand why they left the system; your attorney can help prepare questions.
• Your accountant should analyze the turnover data over the three-year period to confirm the high churn rate.
• Ask the franchisor to provide specific, verifiable reasons for the high number of terminations and non-renewals.

Explanation

The franchisor entity, Patrice Franchising, LLC (Patrice LLC), was formed in August 2022 and has never owned or operated a franchised unit itself. While its personnel may have experience with the predecessor, the entity you are contracting with lacks a direct track record of successfully running one of these businesses. This inexperience at the corporate level introduces significant risk regarding the quality and effectiveness of the operational systems and support you will receive.

Potential Mitigations

• Your business advisor should help you conduct deep due diligence on the specific experience of the current management team in both franchising and this industry.
• It is crucial to interview the earliest franchisees under this new entity to gauge the quality of its systems and support.
• An attorney can help you understand the implications of contracting with a new entity that acquired assets from a predecessor.

Explanation

Item 1 states that the franchisor, Patrice Franchising, LLC (Patrice LLC), has never directly owned and operated a P&A Agency. This lack of direct, hands-on operational experience within the franchising entity itself is a significant risk. It may affect the quality of training, the relevance of operational guidance, and the overall understanding of the day-to-day challenges you will face, potentially leaving you without effective support from a team that has proven they can succeed in the business.

Potential Mitigations

• Thoroughly vet the direct, hands-on operational experience of the specific individuals who will be providing you with training and support; your business advisor can help.
• Speaking with current franchisees about the practical value of the support and guidance they receive is essential.
• Your attorney can advise on the risks of contracting with a franchisor entity that lacks its own history of operational success.

Explanation

The franchisor entity is a successor to a prior company, Patrice & Associates Franchising, Inc. (PAF). Item 3 discloses that this predecessor was involved in multiple legal disputes with its franchisees, including claims of fraud and misrepresentation. These historical issues are significant red flags, as they may indicate systemic problems with the franchise sales process or business model that could have been inherited by the new franchisor entity.

Potential Mitigations

• Your attorney must carefully review the details of all litigation involving the predecessor to understand the nature of the claims and their outcomes.
• It is advisable to ask the current franchisor how the issues that led to the predecessor's litigation have been addressed in the current system.
• Discussing the system's history with long-term franchisees who operated under the predecessor would provide valuable insight.

Explanation

Item 3 discloses a significant pattern of litigation involving the franchisor's predecessor. These include multiple arbitration cases brought by franchisees alleging fraudulent and negligent misrepresentation. In these cases, the predecessor either refunded fees to the franchisee or paid a significant settlement. This history of disputes alleging serious misconduct in the franchise sales process is a major risk and suggests potential systemic issues.

Potential Mitigations

• A thorough review of the allegations and outcomes of all disclosed litigation with your franchise attorney is critical.
• You should treat a history of franchisee-initiated lawsuits alleging fraud as a serious warning sign about the franchisor's sales practices and representations.
• Ask your business advisor to help you conduct enhanced due diligence by speaking with a wide range of current and former franchisees.