Explanation

The franchise system is growing steadily, adding 13 franchised outlets in 2024. However, Item 20 also reveals that 53 franchise agreements have been signed for stores that are not yet open. This large pipeline of unopened stores, flagged as a 'Special Risk' by the franchisor, could strain support and training resources if many attempt to open at once. This risk is compounded by the franchisor's parent company reporting net losses, which could limit its ability to scale support infrastructure.

Potential Mitigations

• A discussion with your business advisor about the franchisor's capacity to support this growth is recommended.
• Inquire with current franchisees, especially recent ones, about the quality and timeliness of the support they received during their opening process.
• Your attorney should ask the franchisor for their plan to manage and support the large number of pending openings.

Explanation

The franchisor entity, Uptown Cheapskate Franchise System, LLC, was formed in July 2022 and only began franchising in October 2022. It acquired the brand from a predecessor. The FDD explicitly lists "Short Operating History" as a special risk. While the brand has been around since 2009, you are contracting with a new ownership and management structure, which introduces risks associated with a newer franchisor entity that may still be refining its systems and support.

Potential Mitigations

• Conducting thorough due diligence on the new management team's experience in both the resale industry and franchising is essential, and a business advisor can help.
• Your attorney should investigate the terms of the asset acquisition from the predecessor to understand any inherited liabilities or obligations.
• It is wise to speak with franchisees who have joined under the new ownership to gauge their experience.

Explanation

The franchisor's parent company was acquired by entities controlled by principals of Horizon Point Capital, which appears to be an investment firm. Private equity or investment firm ownership can create risks where decisions are driven by short-term investor return horizons rather than the long-term health of franchisees. This could manifest as increased fees, reduced support to cut costs, or pressure to use affiliated vendors. The franchisor's right to sell the system adds to this uncertainty.

Potential Mitigations

• Your business advisor can help you research the investment firm's reputation and track record with other franchise brands they have owned.
• It is important to ask current franchisees if they have noticed any changes in franchisor focus or support since the acquisition.
• Your attorney should review the assignment clauses in the Franchise Agreement to understand your rights if the system is sold again.

Explanation

The FDD discloses that the current franchisor acquired the system from a predecessor, Uptown Cheapskate, LLC. Item 3 reveals a significant litigation history involving this predecessor, where it was found liable for $186,750 for failing to properly advise a franchisee regarding a lease negotiation. This history is a material fact, suggesting that the systems and practices you are buying into may have had serious flaws in the past, posing a risk of inherited cultural or operational issues.

Potential Mitigations

• Your attorney should carefully review all disclosures related to the predecessor and the circumstances of the litigation.
• Inquiring with the franchisor about what specific changes have been implemented to prevent such issues from recurring is an important step.
• You should discuss this specific litigation with current franchisees, especially those who were with the system under the predecessor.

Explanation

A concerning litigation history is present. Item 3 discloses that the franchisor's predecessor was found liable in arbitration for $186,750. The finding was that the predecessor failed to advise a franchisee to seek legal counsel for a lease it negotiated. While this is a single case, not a broad pattern of suits, its nature is very serious. It indicates a past failure in providing proper guidance, which is a core function of a franchisor, creating a significant risk for new franchisees.

Potential Mitigations

• A thorough review of the details and outcome of the litigation described in Item 3 with your franchise attorney is critical.
• You should ask the franchisor what specific policies and procedures have been changed since this arbitration to protect franchisees.
• This finding makes it especially important to have your own attorney and real estate professional review all documents and negotiations.