Explanation

Item 20 data reveals a consistently high rate of franchisee exits. In the last three years, hundreds of franchisees have left the system through termination, non-renewal, or ceasing operations, with a turnover rate exceeding 15% in one recent year. This level of churn is a significant indicator of potential systemic problems, which could include lack of profitability or franchisee dissatisfaction. State-specific addenda explicitly flag this high turnover as a notable risk.

Potential Mitigations

• It is critical to contact a significant number of former franchisees from the list in Exhibit F to understand their reasons for leaving the system.
• Your franchise attorney should help you formulate questions for these former franchisees to uncover potential systemic issues.
• A thorough review of the high number of non-renewals with your business advisor is vital, as this could relate to the short one-year term.

Explanation

The franchisor has been in business since late 2019, making it a relatively young franchise system. While an affiliate operated a similar licensed model previously, the franchising history is short. This youth, combined with a history of regulatory actions for improper franchise sales and very high franchisee turnover, suggests the business model and support systems may not be fully proven or stable. This may increase the overall risk of your investment.

Potential Mitigations

• A business advisor should help you conduct extensive due diligence on the franchisor's operational track record since it began franchising in 2020.
• It is crucial to speak with franchisees who have been with the system since the transition from the licensing model to understand the changes.
• Your accountant should scrutinize the financials to assess if the business model has become stable and sustainable.

Explanation

While management has experience operating the Sign Gypsies concept, Item 3 discloses numerous regulatory actions from states like California and Washington for offering franchises without proper registration. This pattern strongly suggests a past lack of experience or diligence in franchise legal and regulatory compliance, which poses a risk to the system's stability and governance. This history of non-compliance is a significant concern for a prospective franchisee.

Potential Mitigations

• Your franchise attorney should carefully review the past regulatory actions and any resulting consent orders to understand their implications.
• Inquiring with the franchisor about the steps they have taken to ensure full regulatory compliance since these events is a critical due diligence step.
• Speaking with current franchisees about the professionalism and competence of the management team is recommended.

Explanation

The franchisor's affiliate, Sign Gypsies, LLC, has a history of regulatory actions in multiple states for selling unlicensed franchises prior to 2020, as disclosed in Item 3. This history is directly relevant as it involves the same business concept and leadership. These past compliance failures create a risk, suggesting a historical pattern of operating outside of franchise laws, which you and your advisors should carefully consider.

Potential Mitigations

• Your franchise attorney must carefully review the details of the past regulatory actions involving the franchisor's affiliate.
• Speaking with franchisees who transitioned from the prior licensing model to the current franchise model could provide valuable insights.
• Your business advisor should help you assess whether the franchisor has implemented robust compliance systems since these past issues occurred.

Explanation

Item 3 reveals a significant pattern of past regulatory litigation. The franchisor and its affiliate have faced administrative proceedings in at least six states for offering and selling franchises or licenses without the required legal registration and disclosure. This history of non-compliance is a major red flag and indicates a significant risk concerning the franchisor's governance and respect for franchise law.

Potential Mitigations

• It is imperative that your franchise attorney thoroughly analyzes the consent orders and other outcomes of these state regulatory actions.
• You should ask the franchisor to explain the circumstances of these past violations and the corrective measures they have since implemented.
• Your attorney can help you understand any rights or remedies you may have as a result of the franchisor's past disclosure issues.