Explanation

Town Square Franchising LLC (Town Square) explicitly warns of its precarious financial condition. The 2024 audited financial statements in Exhibit F show a net loss of over $708,000 and a negative net worth of approximately $39,000. This financial weakness calls into question the franchisor's ability to provide ongoing support, invest in the brand, and fulfill its obligations, which could jeopardize your investment and the system's viability.

Potential Mitigations

• Your accountant must conduct a thorough analysis of the franchisor's financial statements, including all notes and the explicit risk warnings.
• A business advisor can help you assess if the franchisor has sufficient capital and a viable plan to achieve profitability and support the system.
• Discuss the franchisor's plan to remedy its financial condition with them directly, and have your attorney evaluate the responses.

Explanation

While Item 20 tables show no terminations or cessations of operation, Exhibit E lists a 3-unit franchisee that 'Left the system' in 2024. For a young system with only 8 operating franchises at year-end, the departure of a multi-unit operator is a significant event. The FDD appears to categorize this departure as a 'transfer,' which may obscure a potentially high franchisee turnover rate and underlying system issues.

Potential Mitigations

• Your attorney should help you question the franchisor about the specific circumstances surrounding the 3-unit franchisee's departure.
• It is critical to contact the former franchisee listed in Exhibit E to understand their experience and reasons for leaving.
• Have your accountant analyze the potential impact on system stability when a large franchisee leaves a small system.

Explanation

The FDD shows the system grew from 1 to 8 franchised outlets between 2022 and 2024. While growth can be positive, this pace, combined with the franchisor's disclosed financial instability including a significant net loss and negative net worth, presents a risk. Rapid growth could strain Town Square's limited resources, potentially leading to inadequate franchisee support, training, and quality control as the system scales.

Potential Mitigations

• In discussions with current franchisees, specifically inquire about the quality and timeliness of the support they currently receive.
• Your accountant should evaluate whether the franchisor's financial resources, as shown in Item 21, are sufficient to support this rate of growth.
• A business advisor can help you assess the franchisor's infrastructure for scaling its support systems effectively.

Explanation

Town Square Franchising LLC is a new legal entity formed in late 2023 and only began offering franchises in May 2024. The brand and system were previously managed by a parent company, the 'Former Franchisor.' As a new entity, Town Square itself has a very limited operational history and its financial statements show significant initial losses. This presents risks associated with unproven management of the new entity and its long-term financial viability.

Potential Mitigations

• A thorough review of the management team's prior industry and franchising experience, detailed in Item 2, should be conducted with a business advisor.
• Your attorney must carefully analyze the licensing agreements between Town Square, its parent, and the original concept creator (Glenner) to understand the stability of the IP rights.
• Speaking with franchisees who signed agreements with the 'Former Franchisor' is essential to understand the system's history and support levels.

Explanation

The FDD discloses that Town Square is a subsidiary of SH Town Square Franchising, Inc. ('Former Franchisor'), which is its sole member. However, the financial statements provided in Item 21 are only for the new, thinly capitalized Town Square entity and not its more established parent. Given the new entity's negative net worth and reliance on its parent for the brand license, the absence of the parent's financials presents a significant information gap for assessing overall system stability.

Potential Mitigations

• Your accountant should analyze the implications of the new entity's financial weakness and its dependence on its parent company.
• An attorney should advise you on the risks associated with the parent company not providing its own financial statements or a performance guarantee.
• In discussions with the franchisor, inquire why parent company financials are not provided, given the subsidiary's financial state.