Explanation

The franchisor's 2023 audited financial statements in Exhibit H reveal significant financial weakness. Valhallan, LLC (Valhallan) reports a net loss of over $970,000, a members' deficit (negative net worth) of over $600,000, and negative working capital. While parent company contributions have funded operations (Note 2), there is no binding commitment for future support. This financial state, also flagged in the FDD's 'Special Risks' section, questions Valhallan's ability to support you long-term without relying on new franchise fees.

Potential Mitigations

• A thorough review of the financial statements and auditor's notes with your accountant is essential to assess the level of financial risk and dependency on the parent company.
• In discussions with the franchisor, your business advisor can help you inquire about their plan for achieving profitability and the long-term commitment of the parent company.
• Your attorney should review any state-mandated financial assurances, like surety bonds, to understand the specific protections they offer.

Explanation

There appears to be a significant inconsistency regarding franchisee turnover. Item 20, Table 3 reports zero terminations, non-renewals, or other cessations for 2021-2023. However, Exhibit G lists three franchisees who have 'Left the System.' For a new system with only eight franchised outlets at year-end 2023, this represents a very high turnover rate. This discrepancy raises questions about the accuracy of the disclosures and the reasons franchisees are leaving the system so early.

Potential Mitigations

• Your attorney should demand a clear, written explanation from the franchisor reconciling the conflicting information between Item 20 and Exhibit G.
• It is critical to contact the former franchisees listed in Exhibit G to understand their experiences and reasons for leaving the system.
• A business advisor can help you analyze the potential impact of such high early-stage turnover on the system's long-term health.

Explanation

Item 20 data shows the system grew from one to eight franchised units in 2023 and projects opening 32 new franchises in the next fiscal year. This aggressive growth rate, combined with the significant net loss and negative working capital shown in Item 21, presents a risk. The franchisor's support infrastructure could be strained by such rapid expansion, potentially leading to inadequate training, site selection assistance, and ongoing support for all franchisees.

Potential Mitigations

• Discuss the franchisor's specific plans for scaling its support staff and infrastructure to match the projected growth with your business advisor.
• Inquiring with newer franchisees about the current quality and responsiveness of franchisor support can provide valuable insight.
• Your accountant can assess whether the franchisor's financial resources appear adequate to sustain such rapid expansion.

Explanation

Valhallan is a new franchisor, formed in late 2021 and beginning to offer franchises in 2022. The brand has minimal operating history and limited brand recognition. Investing in an unproven system carries higher risk, as its business model, support systems, and long-term market viability are not yet established. The franchisor explicitly acknowledges this in its 'Special Risks' section, noting its 'short operating history,' which you should consider carefully.

Potential Mitigations

• A business advisor can help you conduct extensive due diligence on the management team's prior experience in franchising and in this specific industry.
• Speaking with the earliest franchisees listed in Item 20 is crucial to understand their experience with the developing system.
• Your attorney may be able to negotiate more favorable terms to compensate for the higher risk associated with a new franchise system.

Explanation

The franchisor, Valhallan, is part of a complex structure owned by parent companies, including FranchiCzar Holdings, LLC. While the parent is not explicitly guaranteeing performance, the franchisor's financial statements show a heavy dependence on related-party funding to cover massive operating losses. The financials of these parent companies are not provided, so their own stability and long-term ability to prop up the Valhallan system remain unknown, creating a layer of risk.

Potential Mitigations

• Given the franchisor's financial state, your accountant should carefully review the nature of the parent company support described in the financial footnotes.
• Your attorney should ask the franchisor if they will provide a parent company guarantee to secure the franchisor's obligations to you.
• Understanding the potential risks if the parent company decides to cease funding is a critical discussion to have with your business advisor.