Explanation

LG AS Franchisor LLC (stayAPT) explicitly warns of its poor financial condition. Audited financial statements show significant, recurring net losses for the past three years, totaling over $9.4 million. The company is dependent on capital contributions from its parent for survival, and has obtained a letter of support to meet obligations through May 2026. This indicates a significant risk that stayAPT may be unable to provide promised support or remain a viable business without continued funding.

Potential Mitigations

• A franchise accountant must thoroughly review the audited financial statements, including all notes regarding losses and parental support.
• It is crucial to have your attorney assess the legal enforceability and any limitations of the parent company's letter of support.
• Discuss the franchisor's path to profitability and reliance on its parent company with your financial advisor to gauge long-term stability.

Explanation

Item 20 data reveals very rapid growth. The number of franchised hotels more than quadrupled in 2024, and 14 more units are sold but not yet open. While growth can be positive, such a rapid expansion pace for a young system, especially one with the financial weaknesses disclosed in Item 21, poses a risk. The franchisor’s support infrastructure for training, site development, and operations could be strained, potentially leading to inadequate assistance for you.

Potential Mitigations

• Question the franchisor on how they are scaling their support staff and systems to manage this rapid growth.
• Engaging a business advisor to assess the franchisor's operational capacity relative to its growth commitments is highly recommended.
• Speaking with franchisees who opened recently can provide insight into the current quality of franchisor support during this expansion phase.

Explanation

The franchisor is a new and relatively unproven system, having only started offering franchises in March 2020. The FDD explicitly highlights this in its 'Special Risks' section, noting the limited operating history makes the investment riskier than a franchise with a longer track record. Item 20 data confirms there were only nine operating franchisees at the end of 2024, indicating the system's support and operational models are still in their early stages.

Potential Mitigations

• Given the limited history, performing extensive due diligence by speaking with all existing franchisees is critical.
• A business advisor can help you assess the viability of a young system and the potential challenges you may face.
• Your attorney might be able to negotiate more favorable terms in the Franchise Agreement to compensate for the higher risk of an emerging brand.

Explanation

The FDD discloses that the franchisor's parent company is controlled by investment funds managed by a private equity firm, Lindsay Goldberg & Company. This ownership structure presents a risk that decisions may prioritize short-term investor returns over the long-term health of the system or individual franchisee profitability. This could manifest as increased fees, reduced support to cut costs, or a sale of the entire system, creating uncertainty for your long-term investment.

Potential Mitigations

• A business advisor can help you research the private equity firm's reputation and its track record with other franchise brands.
• It is important to discuss with current franchisees whether they have observed any significant changes in franchisor behavior since the PE acquisition.
• Your attorney should carefully review the franchisor's rights to sell or assign the system and explain the potential impact on you.

Explanation

The FDD discloses the parent company, LG AS Brand Parent LLC, and notes that the franchisor is dependent on it for financial support to continue operations. However, the parent company's financial statements are not included in the FDD. Without them, you cannot independently verify the parent's ability to provide the promised support, creating a significant information gap and risk to your investment should the parent be unable or unwilling to continue funding the franchisor's losses.

Potential Mitigations

• Your attorney should request the parent company's financial statements, arguing they are material given the franchisor's dependency.
• An accountant should analyze the risk to the franchisor if the parent company's support were to cease.
• Your attorney should review the legal enforceability of the 'letter of support' mentioned in the financial notes, as its terms are critical.