Explanation

The financial statements for the guarantor, BFG Holdco, Inc., show significant and recurring net losses, substantial goodwill impairments, eroding stockholders' equity, and negative operating cash flow in two of the last three years. The notes attribute impairments to a strategic decision to reduce the franchise network's size. These factors may suggest a risk to the guarantor's ability to support the franchise system long-term, despite its positive net worth.

Potential Mitigations

• A thorough review of the guarantor's audited financial statements, including all footnotes on losses and impairments, with your accountant is essential.
• Discuss the potential impact of the guarantor's financial performance on the franchisor's ability to provide promised support with your financial advisor.
• Your attorney should review the enforceability and strength of the parent company's performance guarantee.

Explanation

The data in Item 20 indicates significant franchisee turnover and a shrinking system. In 2024, the system saw a net decrease of 24 outlets, with 27 terminations against only 3 openings. This high number of terminations relative to the system size could suggest potential dissatisfaction among franchisees, issues with profitability, or other systemic challenges that may affect your potential for success.

Potential Mitigations

• Contacting a significant number of former franchisees listed in Item 20 to discuss their reasons for leaving is a critical due diligence step your business advisor can help guide.
• An analysis of the turnover rates over the past three years with your accountant can help quantify the churn.
• Your attorney can help you formulate specific questions for the franchisor regarding the high number of terminations.

Explanation

Item 20 data shows the system grew by over 50% in 2022, then stalled in 2023, and contracted in 2024. This volatility may indicate that past rapid growth strained the franchisor's support resources, potentially contributing to the recent high franchisee turnover. The guarantor's financials also mention a strategic shift to reduce the network size, confirming a period of instability and adjustment following this growth phase.

Potential Mitigations

• It is important to discuss the quality and responsiveness of franchisor support with a wide range of current franchisees, from new to established.
• Engaging a business advisor to question the franchisor about how they've managed support infrastructure during these periods of volatility is recommended.
• Have your accountant review the financials to assess if the parent company has the resources to stabilize and support the current system.

Explanation

While the business concept has existed since 2015, the current franchisor entity was formed in 2020 as part of a larger franchise group. This newer ownership structure, combined with the significant financial instability and large goodwill impairments disclosed in the guarantor's financial statements, presents risks similar to those of an unproven system. These factors may impact the franchisor's ability to provide stable, long-term support.

Potential Mitigations

• A franchise attorney should help you scrutinize the corporate history and the terms of the performance guarantee from the parent entity.
• Speaking with franchisees who have operated under both the predecessor and current ownership can provide valuable insight.
• Your accountant must carefully evaluate the guarantor's financial statements to assess the stability of the entity backing your franchise.

Explanation

Item 1 indicates that the franchisor's ultimate parent was acquired by a private equity-related entity. The financial statements in Exhibit E disclose strategic decisions to reduce the franchise network's size and significant goodwill impairments. These actions can be characteristic of a PE-owned company's focus on restructuring, which may prioritize short-term financial metrics over the individual success of every franchisee in the system.

Potential Mitigations

• A business advisor can help you research the private equity firm's reputation and its management style with other franchise brands.
• Discussing any changes in support, fees, or strategic direction since the acquisition with current franchisees is advisable.
• Your attorney should analyze the franchisor's right to sell or assign the franchise agreement, a common exit strategy for PE firms.

Explanation

Item 3 discloses a significant negative history for the predecessor entity, Patch Boys Franchising, LLC. This includes a state attorney general action for failing to disclose a principal's felony conviction and another state action for selling franchises illegally without being registered. This history suggests a prior culture of non-compliance and raises questions about the system's foundation, even though ownership has changed.

Potential Mitigations

• Your franchise attorney must carefully review these past regulatory actions and their resolutions.
• Discussing the transition from the predecessor's management to the current ownership with long-term franchisees can provide important context.
• Inquiring with the franchisor about the specific steps taken to rectify these past issues and ensure future compliance is crucial.

Explanation

The FDD in Item 3 discloses a pattern of significant legal and regulatory actions against the franchisor's predecessor. These include a franchisee lawsuit alleging violations of franchise law, a New York action for failing to disclose a key person's felony conviction, and a Minnesota action for selling franchises without proper registration. Although these actions involve the predecessor, they represent a serious pattern of past misconduct associated with the brand.

Potential Mitigations

• Your franchise attorney should analyze the nature and outcomes of all disclosed litigation and regulatory actions.
• It is important to ask the current franchisor what specific changes in management and compliance procedures have been implemented since these events.
• Consider that this history, while tied to a predecessor, may impact the brand's reputation; a business advisor can help assess this.