Explanation

The franchisor's 2024 financial statements show it is a new entity with a net loss of over $231,000 and has negative working capital. A state addendum warns that your initial investment of $346,600 to $774,000 exceeds the franchisor's total equity of approximately $318,000. This financial weakness could impact its ability to provide support, grow the brand, or even remain operational, presenting a significant risk to your investment.

Potential Mitigations

• A franchise accountant should thoroughly review the franchisor's financial statements, including all footnotes and the state-mandated risk disclosure.
• It is wise to ask the franchisor about its plans for capitalization and funding ongoing support obligations, with guidance from your business advisor.
• Your attorney can help assess the potential implications of the franchisor's financial state on its contractual obligations to you.

Explanation

Item 20 data shows the system is projected to grow from 7 to 26 franchised outlets in its first full year of U.S. operations. For a new franchisor with limited financial resources and no track record of its own, such rapid expansion could strain its ability to provide adequate site selection, training, and ongoing operational support to all new franchisees, potentially compromising quality and franchisee success.

Potential Mitigations

• A discussion with your business advisor about the franchisor's capacity and infrastructure to support this rapid growth would be beneficial.
• You should ask the franchisor directly about their plans for scaling support staff and resources to match unit growth.
• Having your accountant review the franchisor's financials in Item 21 is important to assess if they have the capital to support this expansion.

Explanation

Captain Business Management Co., Limited is a new U.S. franchisor formed in April 2024 with no company-owned locations and only a handful of new franchisees. The business model, brand recognition, and support systems are unproven in the U.S. market. Investing in an emerging system carries higher risk, as its long-term viability and ability to effectively support franchisees have not been established through a significant operating history.

Potential Mitigations

• Conducting extensive due diligence on the management team's experience in both the restaurant industry and U.S. franchising is crucial; a business advisor can help.
• It is important to have your accountant help create conservative financial projections, given the lack of a performance track record.
• Your attorney may be able to negotiate more favorable terms, such as lower fees or better protections, to compensate for the higher risk.

Explanation

The U.S. franchisor, Captain Business, was formed in 2024 and its management, while experienced with the brand in China, appears to have limited history managing a U.S. franchise system. The affiliate responsible for training is based in China. This lack of direct U.S. franchising experience could lead to challenges in providing adequate, market-specific support, training, and strategic guidance for American franchisees.

Potential Mitigations

• Thoroughly vetting the management team's specific experience with U.S. franchising, regulations, and supply chains is a key task for your business advisor.
• You should directly question the franchisor about who on their team has U.S.-based franchise management experience.
• Your attorney can help assess whether the franchisor has engaged experienced U.S. franchise consultants or legal counsel to bridge any experience gaps.

Explanation

Item 1 discloses a Singaporean parent company and several Chinese affiliates who are crucial to the operation, acting as trainers and sole-source suppliers. However, the FDD does not include financial statements for this parent or the key affiliates. Given that the U.S. franchisor entity is newly formed and financially weak, the absence of financial data from these controlling foreign entities obscures the true financial stability and backing of the entire system.

Potential Mitigations

• Your accountant must analyze the disclosed franchisor financials while noting the significant risk from the absence of parent and affiliate financial data.
• A conversation with your attorney is crucial to understand the legal and operational complexities of dealing with a system dependent on foreign entities.
• You should ask the franchisor why financial statements for the parent and key affiliates that provide essential services have not been included.