Explanation

The financial statements for the guarantor, MTY Franchising USA, Inc., show a significant net loss of $12.5 million for 2024, a sharp reversal from a $16.9 million profit in 2023. This loss was driven by major impairment charges. Additionally, the direct predecessor entity, American Blue Ribbon Holdings, LLC, filed for Chapter 11 bankruptcy protection in 2020. This combination of recent losses and predecessor bankruptcy presents a considerable risk to the franchisor's stability and ability to support you.

Potential Mitigations

• A thorough review of the guarantor's complete audited financial statements, including all footnotes and the auditor's report, by your accountant is essential.
• Discuss the implications of the predecessor's bankruptcy and the recent net loss with your business advisor to assess the long-term viability of the brand.
• Your attorney should investigate if any financial assurance, like a bond or escrow, is required by state regulators due to these financial concerns.

Explanation

Item 20 data reveals a significant and steady decline in the number of franchised outlets over the past three years. The total number of franchised units has decreased from 109 to 88, representing a 19% reduction of the system. This consistently high rate of closures and other cessations is a critical warning sign that may indicate systemic issues with franchisee profitability, satisfaction, or the overall viability of the business model.

Potential Mitigations

• Your accountant should help you calculate the annual percentage of unit closures and non-renewals to fully grasp the system's churn rate.
• It is imperative to contact a significant number of former franchisees listed in Item 20 to understand their reasons for leaving the system.
• Engaging a business advisor to analyze these turnover trends in the context of the broader restaurant industry can provide valuable perspective.

Explanation

While the Village Inn brand is long-established, the current franchisor, VI BrandCo, LLC, was formed in 2020 and began franchising in 2021 after its predecessor filed for bankruptcy. You are investing with a relatively new business entity that is operating a legacy brand with a troubled recent history. This combination presents the risks of an unproven franchisor management structure coupled with the potential for inherited brand challenges.

Potential Mitigations

• Your business advisor should help you conduct extensive due diligence on the current management team's experience in both the restaurant industry and in successfully managing franchise systems.
• It is important to speak with franchisees who have been with the system through the ownership change to understand the transition and current support levels.
• An attorney can help you understand any continuing obligations or risks inherited from the predecessor's bankruptcy.

Explanation

The franchisor's direct predecessor, American Blue Ribbon Holdings, LLC, filed for Chapter 11 bankruptcy in 2020. This is a significant negative event in the brand's recent history. The current franchisor acquired the assets out of this bankruptcy. This history could indicate underlying problems with the business model, brand health, or past management that may still pose a risk to new franchisees, despite the change in ownership.

Potential Mitigations

• Your attorney should help you understand any potential lingering liabilities or issues from the predecessor's bankruptcy.
• It's important to ask long-tenured franchisees about their experience before, during, and after the bankruptcy and ownership change.
• A business advisor can help you assess what changes the new franchisor has made to address the issues that may have led to the bankruptcy.

Explanation

Item 3 discloses a significant volume of litigation involving the franchisor’s affiliates and predecessors, such as Kahala, Famous Dave's, and Papa Murphy's. Multiple cases were initiated by franchisees alleging fraud, misrepresentation, and breach of contract. Additionally, there are several concluded administrative actions brought by state regulators for violations of franchise law. This extensive history of disputes may suggest systemic issues within the parent organization's franchising practices and relationships.

Potential Mitigations

• A franchise attorney must carefully review the nature and outcomes of the disclosed litigation to identify any recurring patterns of franchisee complaints.
• Considering the volume of litigation, it would be prudent to ask your attorney to perform independent research on these cases for more context.
• You should treat this pattern of litigation and regulatory actions as a significant red flag and discuss the potential risks extensively with your attorney.