Explanation

The audited financial statements for the parent company, Steele Pomp Investment, LLC (Steele Pomp), show significant net losses of approximately $4.9 million in 2023 and $8.3 million in 2022. While the company reported a net income in 2024, this history of substantial losses could indicate underlying financial pressures. Although Steele Pomp guarantees the franchisor's obligations, this past performance suggests a potential risk to its long-term ability to support the franchise system.

Potential Mitigations

• A thorough review of the parent company's audited financial statements, including all notes, with your accountant is essential to assess its financial stability.
• It is prudent to discuss the historical losses and the recent shift to profitability with your financial advisor to understand the potential future risks.
• Your attorney should evaluate the strength and enforceability of the parent company's guarantee of the franchisor's obligations.

Explanation

The franchise system is shrinking, with a net loss of six salons in 2024 and three in 2023. Item 20 data for 2024 shows six franchised salons were terminated, representing a 9.2% turnover rate based on the 65 units at the start of the year. Such a high rate of terminations and a shrinking system are significant indicators of potential franchisee dissatisfaction or systemic challenges, which could impact your own potential for success.

Potential Mitigations

• It is critical to contact a significant number of the former franchisees listed in Exhibit D2 to understand their reasons for leaving the system.
• Discussing the high turnover rate and shrinking unit count with your business advisor can help gauge the health of the franchise system.
• Your attorney should help you formulate questions for the franchisor regarding the specific circumstances of the recent terminations.

Explanation

Radiant Waxing Franchise, LLC (Radiant Waxing) was formed in 2021 and acquired the assets of the predecessor system, LunchboxWax. The franchisor explicitly flags its short operating history as a special risk. The rebranding, new ownership, and ongoing litigation detailed in Item 3 suggest that this is effectively a new system with unproven long-term stability under its current structure. Investing in a newer system often carries a higher level of risk.

Potential Mitigations

• Conducting extensive due diligence on the management team's experience in both this industry and in franchising is recommended with your business advisor.
• It is crucial to speak with franchisees who were part of the system both before and after the 2021 acquisition to understand the changes.
• Your attorney should be consulted to understand the implications of the ongoing litigation and the franchisor's short operating history.

Explanation

Item 1 discloses that the franchisor is ultimately owned by KSL Capital Partners, a private equity firm. Private equity ownership can create risks, as their primary goal is often maximizing return on investment over a defined period, which may lead to decisions that benefit the PE firm's short-term goals over the long-term health of franchisees. This could manifest as increased fees, reduced support to cut costs, or a future sale of the system.

Potential Mitigations

• A business advisor can help you research the private equity firm's reputation and its track record with other franchise systems it has owned.
• It is important to ask current franchisees about any changes in fees, support, or strategy since the PE firm's acquisition.
• Your attorney should review the Franchise Agreement for any clauses that make it easy for the franchisor to sell the system without your consent.

Explanation

Item 1 identifies Lunchbox Franchise, LLC as a predecessor from which Radiant Waxing acquired the system's assets in 2021. Item 3 discloses significant litigation initiated by a group of franchisees related to this transaction and subsequent changes. This indicates a potentially troubled history and transition, the effects of which appear to be ongoing. The full context of the predecessor's performance and franchisee relations may not be fully transparent, creating risk.

Potential Mitigations

• Your attorney should carefully review all disclosures related to the predecessor and the ongoing litigation stemming from the acquisition.
• It is highly recommended to speak with franchisees who operated under the predecessor to understand the transition and its impact.
• A business advisor can help you research the public record of the predecessor system for any additional information.

Explanation

Item 3 discloses a significant pending lawsuit, 'Kathleen Martin et al. v. Radiant Waxing Franchise, LLC, et al.', filed by a group of franchisees. The claims include breach of contract and issues regarding the handling of brand funds following the franchisor's acquisition of the system from its predecessor. A lawsuit involving multiple franchisees alleging systemic issues is a major red flag that indicates deep dissatisfaction and potential problems with the franchisor's management and fulfillment of its obligations.

Potential Mitigations

• A thorough review of the specific allegations and current status of this lawsuit with your franchise attorney is absolutely essential.
• You should consider this litigation a very serious risk and discuss its potential impact on the system's stability and support with your business advisor.
• It is critical to ask the franchisor for their perspective on the litigation and what steps they are taking to resolve the underlying issues.