Explanation

The franchisor's parent, EHC Holding Company, LLC (BPF LLC), which guarantees performance, has significant financial weaknesses. The audited financial statements in Item 21 show a consolidated net loss of over $6.7 million for 2024, following consecutive multi-million dollar losses in 2023 and 2022. Such persistent losses may raise questions about the parent company's long-term ability to support the franchise system, invest in the brand, or meet its guarantee obligations, potentially increasing your investment risk.

Potential Mitigations

• A franchise accountant should perform a detailed analysis of the parent company's audited financial statements, focusing on cash flow, debt, and the source of its operating funds.
• It is advisable to discuss the implications of these financial losses and the strength of the parent guarantee with your franchise attorney.
• Your financial advisor can help you assess the level of risk this financial instability poses to your personal investment in the franchise.

Explanation

Item 20 data indicates a potentially high rate of franchisee turnover. In 2024, a total of 16 franchisees (7 terminations and 9 who ceased operations) left the system from a starting base of 107 outlets, representing a churn rate of approximately 15%. A similarly high rate occurred in 2023. This level of turnover could suggest underlying issues within the system, such as unprofitability, franchisee dissatisfaction, or other systemic challenges that may affect your potential for success.

Potential Mitigations

• With your accountant, you should analyze the turnover data in Item 20 for the past three years to verify the churn rate.
• It is critical to contact a significant number of former franchisees listed in Exhibit G to understand their reasons for leaving the system.
• Your franchise attorney can help you frame questions to the franchisor regarding the specific circumstances of these departures.

Explanation

The system experienced very rapid growth, particularly in 2022 when the number of franchised units more than doubled. Item 20 shows continued, though slower, growth in subsequent years. When viewed alongside the parent company's significant financial losses detailed in Item 21, this rapid expansion may create a risk that the franchisor's support infrastructure, including training and operational assistance, could be strained or unable to keep pace, potentially impacting the quality of support you receive.

Potential Mitigations

• Asking the franchisor directly about how they have scaled their support staff and systems to manage this growth is a key due diligence step.
• A discussion with your business advisor can help you evaluate whether the franchisor's support infrastructure appears adequate for the current system size.
• Inquire with a broad sample of franchisees, both new and established, about the current quality and responsiveness of franchisor support.

Explanation

The franchisor is part of a large portfolio of brands controlled by The Riverside Company, a private equity firm. This ownership structure may introduce risks, as PE firms often have specific investment timelines and return expectations. Decisions could prioritize short-term financial gains for investors, such as increasing fees or cutting support costs, over the long-term health of the franchise system and individual franchisee profitability. The high turnover and financial losses present in this FDD could be related to this structure.

Potential Mitigations

• It is advisable to research the private equity firm's reputation and track record with other franchise systems it has owned with your business advisor.
• Discuss with your attorney the franchisor's right to sell the system and what protections you might have if ownership changes.
• Ask current franchisees about any changes in fees, support, or company culture since the PE firm's involvement.

Explanation

Item 3 discloses several material lawsuits involving the franchisor's affiliates, which are part of the same parent company portfolio. In some of these cases, the franchisor-affiliated entity either lost the case, resulting in a significant monetary award to the former franchisee, or settled by paying the franchisee. A pattern of litigation with such outcomes within the larger corporate family could suggest potential for disputes and may be a factor to consider in your overall risk assessment.

Potential Mitigations

• Your franchise attorney should carefully analyze the nature and outcomes of all lawsuits disclosed in Item 3, including those involving affiliates.
• It is important to discuss with current and former franchisees if they are aware of a litigious culture within the system.
• Consider that a history of franchisee-favorable litigation outcomes could indicate systemic issues; discuss this risk with your attorney.