Explanation

The franchisor's audited financial statements in Item 21 reveal a history of significant net losses, including over $9 million in 2023, leading to a large retained deficit. While the loss was much smaller in 2024, this history of unprofitability, combined with a balance sheet dominated by intangible assets and goodwill, may indicate financial weakness. This could potentially impact the ability of We Insure, LLC (We Insure) to support you and grow the brand.

Potential Mitigations

• A franchise accountant should perform a detailed analysis of the financial statements, including all footnotes and trends over the past three years.
• Discussing the company's path to profitability and current financial health with the franchisor's management can provide important context.
• Your attorney should verify if any financial performance bonds or escrow arrangements are required by state regulators due to the financial condition.

Explanation

Item 20 data reveals a significant decline in the number of franchised outlets over the last two years, with a high rate of units being "Reacquired by Franchisor" or "Ceased Operation." This high turnover rate, exceeding 15% annually, is a critical red flag. It may suggest systemic problems, such as franchisee unprofitability or dissatisfaction with the business model, which could affect your potential for success. The franchisor notes many reacquisitions are absorbed into other agencies.

Potential Mitigations

• It is critical to contact a significant number of former franchisees from the list in Exhibit F to understand their reasons for leaving the system.
• Your accountant should help you analyze the turnover data tables to calculate the precise rate of churn over the past three years.
• Engaging a business advisor to question the franchisor about the high turnover and the nature of the "reacquisitions" is highly recommended.

Explanation

While the franchisor has been operating since 2009, it underwent a significant ownership change in 2021, is experiencing high franchisee turnover, and has a history of financial losses. This combination of factors suggests a system in a state of flux rather than a stable, proven one. An unproven or transitioning system can carry higher risks related to support, brand recognition, and long-term viability, which you should carefully consider.

Potential Mitigations

• Conducting extensive due diligence on the current parent company's track record with franchise systems is a task for your business advisor.
• Speaking to franchisees who have been with the system before and after the 2021 ownership change can provide valuable insight.
• Your attorney can help you assess the stability of the system and whether additional protections can be negotiated into the agreement.

Explanation

Item 1 discloses that the franchisor is owned by PEAK6 Insurtech Holdings, LLC, which appears to be a private equity or investment firm. Such ownership can introduce risks, as decisions may prioritize investor returns on a specific timeline over the long-term health of franchisees. This could manifest as pressure to increase fees, cut support costs, or focus on rapid franchise sales. The franchisor's right to sell the system without your consent further compounds this risk.

Potential Mitigations

• Having a business advisor help you research the ownership group's reputation and track record with other franchise systems is advisable.
• It is important to ask current franchisees if they have noticed any changes in fees, support, or system focus 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

This risk is present. The franchisor discloses in Item 1 a history of restructuring and operating under different predecessor names. Furthermore, Item 3 discloses two significant lawsuits filed by former franchisees against a predecessor entity, We Insure, Inc. These lawsuits included allegations of fraud and breach of contract and resulted in substantial settlement payments by the predecessor. This history could indicate past systemic issues that may or may not have been resolved under the current ownership.

Potential Mitigations

• Your attorney must carefully review the details of the litigation disclosed in Item 3 to understand the nature of the past allegations.
• Asking the franchisor what specific changes have been implemented to address the issues raised in the predecessor litigation is crucial.
• A business advisor can help you research the history of the brand and its predecessors to look for patterns of franchisee complaints.

Explanation

Item 3 discloses two prior lawsuits brought by franchisees against the franchisor's predecessor. The allegations included breach of franchise agreement, fraud, and violations of the Florida Deceptive and Unfair Trade Practices Act. Both cases were settled, with the franchisor's predecessor paying the former franchisees significant amounts ($254,500 and $127,906). This pattern of litigation involving serious claims like fraud, even against a predecessor, is a significant risk and warrants careful consideration.

Potential Mitigations

• A thorough review of the specific allegations and settlement details in Item 3 with your franchise attorney is critical.
• It is important to ask the franchisor what has changed in their operations or agreements to prevent similar disputes from arising in the future.
• You should discuss this litigation history with current and former franchisees to get their perspective on the franchisor's business practices.