Explanation

The franchisor, SAH Holdings, LLC (SAH), was formed in March 2023 and its audited financials show it is a thinly capitalized entity that is highly dependent on its parent company, Sushi Avenue, LLC. SAH's balance sheet reflects minimal cash and a very large receivable from its parent. This financial structure suggests SAH may not have sufficient independent resources to support the franchise system or fulfill its obligations without continuous support from its parent.

Potential Mitigations

• A franchise accountant should carefully analyze the financial statements of SAH, including the notes detailing related-party transactions, to assess its standalone viability.
• It is important for your attorney to review any financial guarantees provided by the parent company and understand their enforceability.
• Discussing the practical effects of this financial structure with current franchisees could provide valuable insight; a business advisor can help frame these questions.

Explanation

Item 20 data for 2024 indicates a very high annual turnover rate. When combining terminations (7), franchisor reacquisitions (5), and transfers (59), a total of 71 units, or 33.3% of the franchises existing at the start of the year, changed hands. A high number of transfers can sometimes mask underlying issues such as franchisee unprofitability or dissatisfaction, as exiting franchisees may be selling under duress. This level of churn is a significant indicator of potential systemic problems.

Potential Mitigations

• Your business advisor should help you contact a significant number of the 59 franchisees who transferred their business in 2024 to understand their reasons for selling.
• An accountant should analyze the turnover data across all categories in Item 20 to get a full picture of system stability.
• A discussion with your franchise attorney about the implications of such high turnover on the health of the system is highly recommended.

Explanation

The franchise system has grown from zero to 310 franchised outlets in just two years, primarily by converting a large number of company-operated or contractor locations. This explosive growth, while demonstrating demand, places immense strain on a new franchisor's resources. There is a risk that the franchisor’s support systems, including training, quality control, and operational assistance, may not be able to keep pace with the needs of so many new franchisees at once.

Potential Mitigations

• In discussions with the franchisor, your business advisor can help you probe for details on how they have scaled their support staff and infrastructure to manage this rapid growth.
• It is critical to speak with franchisees who converted early in the process about the quality and responsiveness of the support they received.
• Your attorney can review the franchisor's contractual support obligations in Item 11 to assess if they are specific and enforceable.

Explanation

SAH Holdings, LLC only began franchising in late 2023, and the FDD explicitly highlights its "Short Operating History" as a special risk. Although its affiliate has a longer history of operating sushi bars, managing a franchise system requires a different set of skills and support structures. As an investor in a new system, you face higher risks related to unproven support, potential strategic errors by inexperienced franchise management, and overall system instability.

Potential Mitigations

• Your due diligence should include a thorough investigation into the specific franchising experience of the management team listed in Item 2, with the help of a business advisor.
• It is advisable to contact some of the very first franchisees to learn about their experiences with the new franchisor's systems and support.
• Given the higher risk, a franchise attorney may be able to help you negotiate more favorable terms as compensation.

Explanation

Item 3 reveals a significant issue with the franchisor's predecessor, Sushi Avenue, Incorporated. It was subject to a consent order from the State of Washington for violating franchise law by selling 14 franchises without being registered or providing an FDD. This history of regulatory non-compliance is a serious red flag, raising concerns about the business practices and ethical culture that may have been inherited by the current franchisor entity.

Potential Mitigations

• A franchise attorney should be consulted to discuss the severity of this past violation and its potential implications for you.
• It is important to ask the franchisor what specific changes in compliance procedures have been implemented since this violation occurred.
• Your due diligence should include confirming the franchisor is currently in good standing with your state's franchise regulators, which your attorney can assist with.

Explanation

A significant pattern of litigation is present. Item 3 discloses that the franchisor's predecessor, Sushi Avenue, Incorporated, was subject to an administrative proceeding by Washington state for the illegal sale of franchises. This is a material legal action indicating a past failure to comply with franchise law. While the other three civil cases were settled, this regulatory enforcement action by a state government is a significant concern about the company's historical compliance culture.

Potential Mitigations

• Your franchise attorney must explain the seriousness of a state-level regulatory action for illegal franchise sales.
• It's crucial to ask the franchisor what specific policies and personnel have been changed to prevent future regulatory violations.
• Confirming the franchisor's current registration status and compliance history in your state is a vital step your attorney can take.