Explanation

The franchisor’s audited financial statements reveal significant financial weakness. Reed Franchise Partnerships LLC (Reed LLC) reported a net loss of $32,210 for the fiscal year ending June 30, 2024, and has a negative Member's Equity of $91,694. This financial position may suggest an inability to provide adequate support to franchisees or to invest in the system's growth, posing a substantial risk to your investment.

Potential Mitigations

• An experienced franchise accountant must thoroughly analyze the franchisor's financial statements, including all footnotes and cash flow statements.
• Discuss the franchisor's plan to achieve profitability and financial stability with your business advisor.
• Your attorney should investigate if any financial assurance, such as a bond or escrow, is required by your state due to the negative net worth.

Explanation

Item 20 tables show extremely high franchisee turnover. In the fiscal year 2023, the system started with three franchisees and had four exits (two terminations and two ceased operations). This rate of attrition, especially in a very young system, is a significant red flag. It may indicate systemic problems with the business model, franchisee profitability, or the support provided by the franchisor, representing a major risk to a new franchisee's potential for success.

Potential Mitigations

• It is critical to contact a significant number of former franchisees listed in Exhibit F to understand their reasons for leaving the system.
• A thorough discussion with your business advisor is needed to weigh the severe risks indicated by this turnover data.
• Your attorney should help you formulate specific questions for the franchisor regarding the high number of exits and the support they provide.

Explanation

The franchise system is growing very quickly, expanding from one to nine outlets in just two years. When combined with the franchisor's disclosed financial losses and negative equity in Item 21, this rapid growth presents a risk. Reed LLC's resources may be strained, potentially compromising its ability to provide the necessary training, support, and infrastructure to its expanding network of franchisees. This could negatively impact your business operations and success.

Potential Mitigations

• In discussions with the franchisor, inquire about their specific plans to scale their support staff and infrastructure to match unit growth.
• Speaking with franchisees who joined at different times can provide insight into whether support quality has changed as the system has grown.
• A business advisor can help you evaluate if the franchisor's support capabilities appear adequate for its current and projected size.

Explanation

Reed LLC is a new franchisor, having started its US franchise operations in November 2021. The system is unproven, with a very limited operational track record and significant franchisee turnover, as shown in Item 20. Investing in a new franchise system carries higher intrinsic risks, including potential flaws in the business model, underdeveloped support systems, and minimal brand recognition. The franchisor's own financial instability in Item 21 heightens these concerns.

Potential Mitigations

• Engaging a business advisor to perform deep due diligence on the viability of the business model is essential.
• Your attorney should scrutinize the franchise agreement for any additional protections given the higher risk of a new system.
• You should speak with the earliest-joining franchisees listed in Item 20 to learn about the evolution of the system and its support.

Explanation

Reed LLC's management team, while experienced within the global Reed recruitment organization, has very limited history in managing a U.S. franchise system, which only began in late 2021. This lack of specific U.S. franchising experience could lead to challenges in providing adequate support, marketing, and operational guidance tailored to the American market. This risk is amplified by the system's newness and high franchisee turnover.

Potential Mitigations

• Question the franchisor directly about their specific strategies for the U.S. market and the U.S.-based support they provide.
• Speaking with U.S.-based franchisees is critical to gauge the quality and relevance of the support and training provided by the UK-based management.
• Your business advisor can help assess if the management team's skills translate effectively to the U.S. franchise context.