Explanation

The franchisor, Voodoo Licensing LLC (Voodoo LLC), is in a precarious financial state. Audited financial statements reveal a negative net worth in 2022, 2023, and 2024, and net losses in all three years. Current liabilities also exceeded current assets in 2024. The FDD explicitly discloses this as a "Special Risk," questioning the franchisor's ability to provide support. This financial weakness could severely impact its ability to support you or sustain the system.

Potential Mitigations

• Your accountant must conduct a thorough review of the franchisor's financial statements, including all footnotes and trends, to assess its viability.
• A business advisor can help you evaluate whether the franchisor has sufficient capital and cash flow to meet its obligations without relying on new franchise sales.
• Consulting with your attorney about the implications of the disclosed financial risks and any state-mandated financial assurances is critical.

Explanation

The franchise system exhibits a very high rate of franchisee turnover. Item 20 data from 2024 shows four terminations on a base of 13 open franchises, a churn rate of over 30%. Exhibit I, which lists franchisees who have left the system, suggests even higher numbers. This level of turnover is a significant red flag that may indicate systemic problems, such as unprofitability, franchisee dissatisfaction, or inadequate support from Voodoo LLC.

Potential Mitigations

• It is imperative to contact a significant number of former franchisees listed in Item 20 and Exhibit I to understand their reasons for leaving the system.
• Analyzing the turnover data with your accountant will help quantify the churn rate and identify any concerning trends over the past three years.
• Your attorney can help you frame specific questions for the franchisor regarding the high turnover and what steps are being taken to address it.

Explanation

The system is undergoing very rapid growth, expanding from 7 to 23 franchised outlets between the start of 2023 and the end of 2024. When combined with the franchisor's weak financial position as shown in Item 21, this rapid expansion creates a significant risk that Voodoo LLC's support infrastructure—including training, site selection assistance, and operational guidance—may be insufficient to meet the needs of all new and existing franchisees.

Potential Mitigations

• A business advisor should help you question the franchisor about their specific plans and resources allocated for scaling their support systems to match franchise growth.
• Interviewing both new and established franchisees about the current quality and responsiveness of franchisor support is a crucial step.
• An accountant's review of the franchisor's financials is necessary to determine if they have the capital to support this rapid expansion.

Explanation

Voodoo LLC is a relatively new franchisor, having been established in 2018 and starting to franchise in 2019. While it has some years of operating history, the combination of its newness, rapid growth, high franchisee turnover, and persistent financial losses suggests an unproven and potentially unstable franchise system. This elevates the risk of inadequate support, underdeveloped systems, and potential business model flaws that could affect your investment.

Potential Mitigations

• With a business advisor, you should conduct extensive due diligence on the management team's prior experience in both franchising and the restaurant industry.
• Speaking with the earliest franchisees in the system can provide valuable insight into the evolution of the brand and the franchisor's support capabilities.
• Your accountant can assess whether the franchisor is sufficiently capitalized to weather its ongoing losses and support its franchisees.

Explanation

A significant pattern of litigation exists. Item 3 discloses three recent and serious legal actions against Voodoo LLC or its affiliate. Two are ongoing, with one lawsuit and one arbitration involving claims of fraud, misrepresentation, and breach of contract. One case specifically relates to a franchisee’s inability to obtain a required liquor license. This pattern suggests potential systemic issues in the franchise sales process, support, or business model, representing a major risk.

Potential Mitigations

• Your attorney must thoroughly review the specific allegations, status, and potential implications of all litigation disclosed in Item 3.
• It is highly advisable to contact the franchisees involved in this litigation, if possible, to understand their perspective.
• Treating this pattern of franchisee-initiated litigation as a serious red flag and discussing its potential impact on your investment with your attorney is essential.