Explanation

The franchisor explicitly warns that its parent's audited financial statements contain a "going concern" notice, expressing an auditor's substantial doubt about its ability to continue operating. The financials in Exhibit D show a significant member's deficit for the past two years. This poses a critical risk that Quiz Holdings, LLC (Quiznos) may lack the financial resources to provide support, meet its obligations, or even remain in business, a risk confirmed by the state of Illinois's fee deferral requirement.

Potential Mitigations

• An experienced franchise accountant must thoroughly analyze the parent company's financial statements, including all footnotes and the specific language of the auditor's going concern opinion.
• Discuss with your attorney the legal and practical implications of the 'Guarantee of Performance' from this financially distressed parent company.
• Your financial advisor should help you assess if the potential rewards of this franchise justify the significant risk of franchisor insolvency.

Explanation

Quiznos directly discloses a high turnover rate as a special risk, stating a large number of outlets have closed in the last three years. Item 20 data confirms a significant number of terminations, non-renewals, and other cessations of operation, with franchisee churn rates exceeding 15% in recent years. This high rate is a major red flag that may indicate systemic issues, such as franchisee unprofitability, dissatisfaction with the system, or other operational challenges.

Potential Mitigations

• It is critical to contact a significant number of former franchisees from the list in Exhibit K to understand why they left the system.
• Your accountant should help you calculate the precise annual turnover rates from the Item 20 tables to fully grasp the trend.
• Discuss the potential reasons for this high turnover and the associated risks to your investment with your business advisor.

Explanation

While the Quiznos brand has existed for many years, the current franchisor entity, Quiz Holdings, LLC, was formed in 2018 after a major transaction following the predecessor's bankruptcy. It operates with a negative member's equity and a going concern notice. This combination of a relatively new corporate structure overlying a legacy brand with a troubled history presents unique risks related to financial stability and operational strategy that differ from a long-established, stable franchisor.

Potential Mitigations

• Conduct extensive due diligence on the current management team's experience and their strategy for the brand since the 2018 transaction, with help from your business advisor.
• Speak to franchisees who have operated both before and after the 2018 ownership change to understand shifts in support and strategy.
• Your accountant should carefully analyze the post-2018 financial performance and stability of the franchisor entity.

Explanation

Item 1 discloses that the franchisor and its parent companies are ultimately controlled by High Bluff Capital Partners, LLC (HBCP), a private equity firm. This ownership structure can introduce risks, as decisions may prioritize investor returns over the long-term health of franchisees. This is amplified by the parent company's disclosed financial instability and going concern notice, which may suggest pressure for short-term cash flow or a potential future sale of the system.

Potential Mitigations

• Research the private equity firm's track record with other franchise systems they have owned with help from your business advisor.
• Talk to franchisees about any changes in support, fees, or system direction since the private equity acquisition.
• Your attorney should review the Franchise Agreement for terms related to the sale of the franchise system and its implications for you.

Explanation

The franchisor, Quiz Holdings, LLC, is a subsidiary of its parent, REGO Intermediate Holding Company, LLC (REGOIHC). The FDD appropriately includes the parent's audited financial statements and a Guarantee of Performance from the parent. However, those financial statements reveal a 'going concern' notice and a significant member's deficit. Therefore, while the parent is disclosed and provides a guarantee, the value and reliability of that guarantee are questionable given the parent's own disclosed financial instability.

Potential Mitigations

• Your attorney must carefully review the terms and enforceability of the parent's Guarantee of Performance.
• Have an experienced franchise accountant analyze the parent company's financial statements to assess its actual ability to backstop the franchisor's obligations.
• Discuss the risk that the parent guarantee may be of little practical value, given its financial state, with your legal and financial advisors.

Explanation

Item 1 discloses a complex history of predecessors, and Item 4 reveals a significant Chapter 11 bankruptcy filing by a key predecessor, QFA, in 2014. Furthermore, Item 3 details a history of significant litigation filed by franchisees against predecessors, alleging fraudulent schemes and other misconduct. This history indicates the brand has faced substantial operational, financial, and legal challenges in the past, the remnants of which could potentially affect the current system's culture and stability.

Potential Mitigations

• Your attorney should carefully review the disclosures in Items 1, 3, and 4 to understand the system's troubled history.
• When speaking with long-term franchisees, inquire about their experiences under the predecessors and how the system has changed under the current ownership.
• Discuss with your business advisor how this legacy of bankruptcy and litigation might impact the current franchisor's strategies and franchisee relations.

Explanation

Item 3 discloses extensive litigation involving the franchisor's predecessors. Numerous lawsuits were filed by franchisees between 2012 and 2014 alleging serious claims like fraudulent schemes, racketeering, and selling goods at inflated prices. While these cases are listed as completed, this pattern of significant, franchisee-initiated litigation against the system's prior operators is a major red flag. It suggests a history of deep-seated franchisee dissatisfaction and disputes over core business practices.

Potential Mitigations

• Your attorney must carefully review the nature, allegations, and outcomes of all disclosed predecessor litigation in Item 3.
• Consider that this history may influence the culture and practices of the current franchisor; this should be a key topic of discussion with your business advisor.
• Ask current, long-term franchisees about this period of litigation and what has changed to prevent similar issues from recurring.