Explanation

TPP Franchising LLC (TPP) explicitly identifies its "Financial Condition" as a special risk. The audited financial statements in Item 21 reveal a significant Member's Deficit of over $563,000 and a net loss exceeding $1.1 million for 2024. The company's liabilities far exceed its assets, raising questions about its ability to fund its support obligations without continued funding from its parent companies. This financial weakness presents a substantial risk to your investment.

Potential Mitigations

• Your accountant must perform a deep analysis of the audited financials, including the significant related-party loans and member's deficit.
• Engage your franchise attorney to understand the implications of the state-mandated fee deferrals mentioned in the addenda, which are required due to this financial condition.
• A business advisor can help you assess if the franchisor's parent company has a strong track record of supporting its subsidiary franchise systems.

Explanation

While the franchise system is new, Item 20 and its exhibits show a concerning early trend. As of the end of 2024, no franchised locations were open, but one franchisee has already left the system due to a "Failure to Open." This represents a high rate of negative outcomes for a system with only nine agreements signed. This early departure could signal potential challenges with the business model, support system, or site selection and development process.

Potential Mitigations

• Contacting the franchisee who left the system, if possible, is crucial for understanding why they failed to open; your attorney can help guide this sensitive conversation.
• Discuss this early turnover with the franchisor to understand the circumstances and what steps have been taken to prevent recurrence.
• A business advisor can help you weigh the risks of joining a new system that is already showing signs of franchisee churn.

Explanation

The franchisor is a new company planning to grow from zero operating units. Item 20 shows nine agreements have been signed and projects three openings in the next year. Given the franchisor's limited operating history and weak financial position as disclosed in Item 21, there is a risk that its support infrastructure may not be able to keep pace with this planned growth, potentially affecting the quality of training and assistance you receive.

Potential Mitigations

• A business advisor can help you question the franchisor about their specific plans for scaling support staff and systems to match the projected growth.
• In discussions with the initial franchisees listed in Exhibit D-1, inquire about the current quality and responsiveness of franchisor support.
• Your accountant should analyze whether the franchisor's financial model can sustain the hiring needed to support new units.

Explanation

The franchisor explicitly discloses "Short Operating History" as a special risk. The company only began offering franchises in November 2023, and as per Item 20, no franchised locations were operational at the end of the last fiscal year. Investing in a new system carries higher risk as the business model, operating procedures, and support systems are unproven in the marketplace, and there is no performance history from other franchisees to evaluate.

Potential Mitigations

• A thorough investigation of the management team's prior industry and franchising experience, detailed in Item 2, is essential with help from a business advisor.
• Your attorney might be able to negotiate more franchisee-favorable terms to compensate for the higher risk of an unproven system.
• Creating a detailed business plan with your accountant based on independent research is critical given the lack of operating history.

Explanation

The franchisor is controlled by NRD Partners II, L.P., a private equity firm. PE ownership can create risks that decisions will prioritize short-term investor returns over the long-term health of the system or franchisee profitability. The Franchise Agreement also permits the franchisor to sell the entire system to another company at any time without your consent, potentially changing the leadership, support, and strategic direction of the brand you invested in.

Potential Mitigations

• Research the track record of NRD Partners II, L.P. and its other franchise brands to understand their typical operating philosophy with a business advisor.
• Discuss with your attorney the implications of the franchisor's unrestricted right to assign the franchise agreement.
• Inquire with any available franchisees about any changes in fees, support, or strategy since the PE firm's involvement began.