Explanation

The franchisor, Supreme Service Solutions, Inc. (SSS), shows a large related-party receivable of $2.16 million from its affiliate, GBC. This means SSS is funding its affiliate, creating a financial dependency. Your success may be tied not just to SSS's health, but also to the financial stability and performance of GBC, which has a history of regulatory issues. This inter-company loan represents a significant portion of the franchisor's assets and poses a concentration risk.

Potential Mitigations

• An accountant should analyze the audited financial statements, paying close attention to the nature of the related-party receivable and its potential impact on cash flow.
• Discuss the financial relationship and dependencies between SSS and its affiliate GBC with your financial advisor to assess the combined risk.
• Your attorney should review any guarantees or support agreements between the two entities.

Explanation

Item 20 data reveals an extremely high franchisee turnover rate. While the summary table shows only one 'ceased operation' in 2023, the attached list in Exhibit E identifies 32 franchisees who have left the system. With only 24 operating franchised outlets at the end of 2023, this indicates that more franchisees have ceased operations than were currently active. This is a critical indicator of potential systemic problems, franchisee dissatisfaction, or lack of profitability.

Potential Mitigations

• It is crucial that you contact a significant number of the former franchisees listed in Exhibit E to understand their reasons for leaving the system.
• Your attorney and accountant should help you scrutinize the discrepancy between the Item 20 tables and the franchisee lists.
• Treat this extremely high turnover as a major red flag about the viability and support of the franchise system; discuss the implications with your business advisor.

Explanation

The franchised outlet count grew from 0 to 24 in just two years (2022-2023), with projections for more growth. While growth can be positive, such rapid expansion for a new system can strain its ability to provide adequate site selection, training, and ongoing operational support for all franchisees. The high franchisee turnover rate disclosed elsewhere suggests support infrastructure may already be insufficient to handle the rapid growth, increasing your risk of receiving inadequate assistance.

Potential Mitigations

• A business advisor can help you question the franchisor about their specific plans for scaling support infrastructure to match this rapid pace of growth.
• Inquire with a wide range of existing franchisees about their experiences with the quality and timeliness of franchisor support.
• Your accountant should review the franchisor's financials to assess whether they are reinvesting sufficiently in support systems.

Explanation

SSS is a very new franchisor, having been formed in late 2021 and beginning franchising in 2022. The system has a limited operating history, minimal brand recognition, and a very high rate of franchisee turnover as shown in Item 20. While management has experience from an affiliate, this specific 'Supreme Deli' concept is unproven. This represents a higher-than-average risk of system-wide challenges or failure compared to more established franchise systems.

Potential Mitigations

• Extensive due diligence is required; with your business advisor, speak with as many current and former franchisees as possible.
• Your attorney should carefully review the management team's history, particularly the regulatory actions against their affiliated company.
• An accountant should analyze the financial statements to determine if the company is sufficiently capitalized to support a new system.

Explanation

While the management team listed in Item 2 has prior industry experience, they also manage an affiliated company, GBC, which has a documented history of regulatory actions for violating franchise sales laws in multiple states, as disclosed in Item 3. This raises significant concerns about the management team's approach to franchise compliance and ethics, which directly translates to a higher risk for you as a franchisee operating under their direction.

Potential Mitigations

• Your attorney must carefully evaluate the Item 3 disclosures regarding the management's past regulatory violations.
• Discuss the implications of this compliance history with your business advisor as it reflects on the corporate culture you would be joining.
• Ask the franchisor direct questions about the steps they have taken to ensure compliance with all franchise laws going forward.

Explanation

Item 3 discloses that the franchisor's affiliate, GBC, which is run by the same management, has been the subject of two separate administrative actions by state regulators in Washington and California. These actions were for violating franchise investment laws by selling franchises without providing an FDD or being registered. This pattern of regulatory non-compliance is a significant red flag regarding the management’s approach to legal and ethical obligations, which could directly expose you to risk.

Potential Mitigations

• Your attorney must carefully review the consent orders and settlements in Item 3 to understand the severity of the past violations.
• Discuss these regulatory actions with the franchisor and ask what specific compliance procedures have been implemented to prevent recurrence.
• A business advisor can help you weigh this history as a significant factor in your decision to invest.