Explanation

The franchisor's 2023 financial statements appear profitable. However, they disclose two major risks: a high concentration of revenue from just two customers and a large loan of over $2.1 million to an affiliate company. The loss of a key customer or financial trouble at the affiliate could significantly impact the franchisor's stability and its ability to support you, jeopardizing your investment.

Potential Mitigations

• An experienced franchise accountant should thoroughly review the franchisor's financial statements, including all footnotes and especially the notes on customer concentration and related party transactions.
• Discuss the implications of the high customer concentration with a business advisor to understand the stability risk to the entire system.
• Ask your attorney about the legal ramifications if the franchisor's financial stability weakens due to these disclosed risks.

Explanation

The system expanded from zero to 134 locations in a single year, as shown in Item 20. Such explosive growth can strain a franchisor's ability to provide adequate training, site support, and quality control. This may lead to operational challenges and diluted brand standards, potentially impacting your business's performance and the support you receive while still paying full fees.

Potential Mitigations

• Engaging a business advisor to assess whether the franchisor's support infrastructure is capable of handling such rapid expansion is a prudent step.
• It is wise to ask current franchisees about the quality and timeliness of the support they are currently receiving from the franchisor.
• Have your accountant review the franchisor's financials in Item 21 to evaluate if they are reinvesting sufficiently to support this growth.

Explanation

The franchisor, Supreme Service Solutions, Inc. (SSS), is a new company with a very limited operating history, as disclosed in the "Special Risks" section. While its management has experience with an affiliate, this specific "Supreme Produce" franchise system is unproven. Investing in a new system carries higher risks, including the possibility of an unrefined business model, underdeveloped support systems, and low brand recognition.

Potential Mitigations

• A business advisor can help you conduct extensive due diligence on the founders' and management's direct experience in this specific industry segment and in franchising.
• It is critical to speak with the earliest operators in the system to learn about their experiences and the franchisor's performance.
• Your accountant should carefully assess the franchisor's capitalization to ensure it has the financial resources to support a new, growing system.

Explanation

The management team has extensive experience in the kiosk food service industry through its affiliate, GBC Food Services, LLC. However, that same affiliate has a history of regulatory actions in two states for selling franchises illegally, which is a significant negative factor concerning the management's compliance history. This presents a mixed picture of experienced operators with a concerning regulatory track record.

Potential Mitigations

• Your attorney must be consulted to discuss the seriousness of the regulatory actions disclosed in Item 3 against the affiliate.
• A business advisor can help you weigh the management's operational experience against the risks posed by their compliance history.
• When speaking with current operators, ask about their direct experiences with the management team's professionalism and support.

Explanation

The franchisor itself has no litigation history. However, its affiliate, GBC Food Services, LLC, which shares the same management, has two recent, significant regulatory actions against it in Washington and California. Both actions were for selling franchises without a registered FDD. This pattern of violating franchise law, even by an affiliate, is a major red flag concerning the management's compliance and ethics.

Potential Mitigations

• It is imperative to discuss the gravity of the affiliate's regulatory violations in Item 3 with your franchise attorney.
• Your accountant should consider if the fines paid by the affiliate impact the overall financial health of the enterprise.
• A business advisor can help you assess the operational risks associated with a management team that has a history of regulatory non-compliance.