Key Items to Watch out for in the Home-Grown Industries of Georgia, Inc. 2020 FDD

Certain states require that the following risk(s) be highlighted: 1. Out-of-State Dispute Resolution.The preliminary agreement and franchise agreement require you to resolve disputes with the franchisor by litigation only in Georgia. Out-of-state litigation may force you to accept a less favorable settlement for disputes. It may also cost more to litigate with the franchisor in Georgia than in your own state.

Certain states may require other risks to be highlighted. Check the “State Specific Addenda” (if any) to see whether your state requires other risks to be highlighted.

Item 5: Initial Fees

We currently charge a $50,000 initial franchise fee. You must pay this fee in a lump sum when you sign the Franchise Agreement, less any deposit you paid under a previously-signed Preliminary Agreement (Exhibit C). We routinely use the Preliminary Agreement when you have not yet located or we have not yet accepted your Restaurant’s site. You must pay us a $10,000 deposit when you sign the Preliminary Agreement. You must pay us the rest of the initial franchise fee when you sign the Franchise Agreement. We also use the Preliminary Agreement if you are an existing franchisee and want to acquire development rights for multiple Mellow Mushroom restaurants. You must pay us a $10,000 deposit when you sign the Preliminary Agreement and the rest of the development fee (described below) when you sign the Development Rights Rider.

You may terminate the Preliminary Agreement any time before signing a Franchise Agreement or Development Rights Rider. We may terminate the Preliminary Agreement: (a) for any or no reason within 15 days after we sign it; (b) after this 15 days if another franchise applicant submits and we accept a site within the geographic area described in the Preliminary Agreement, or we decide to grant a different franchise applicant development rights for Mellow Mushroom restaurants to be developed in or near that area; (c) (i) if you do not sign a Franchise Agreement after we accept the site, or (ii) after 90 days if you do not find or are not prepared to secure, or we do not accept, a site; (d) after 90 days if you are an existing franchisee who expressed an interest in acquiring development rights but have not signed our Development Rights Rider; (e) if you sign a real estate agreement for the site before we authorize you to do so; (f) if you (or an owner) made any material misrepresentation or omission in the franchise application; (g) if you (or an owner) are convicted of or plead guilty or no contest to a felony or other crime or offense; (h) if you (or an owner) engage in conduct we believe may materially and adversely affect a Mellow Mushroom restaurant’s reputation or the goodwill associated with the Marks; or (i) if you (or an owner) make unauthorized use or disclosure of our confidential information.

If we or you terminate the Preliminary Agreement under (a) above, or we terminate the Preliminary Agreement under (b) above, we will refund (without interest) your full $10,000 deposit within 10 days after you send us a signed general release. If you terminate the Preliminary Agreement after the initial 15 days and before we accept a proposed site, or if we terminate the Preliminary Agreement under (c)(ii) or (d) above, we will refund (without interest) $5,000 of your deposit, minus any expenses we incurred (for example, for site inspection and evaluation, reviewing your proposed lease, giving you information concerning a Mellow Mushroom restaurant’s operation, travel and living expenses, compensation of our employees and agents, and legal fees and related expenses), within 10 days after you send us a signed general release. If we terminate the Preliminary Agreement under (c)(i) or any of (e) through (i), we will not refund any portion of the deposit. The initial franchise fee is not refundable once paid.

If you are a new prospective franchisee, or an existing franchisee, and want to acquire development rights for multiple Mellow Mushroom restaurants, we then prepare (with your knowledge) a Development Rights Rider reflecting our business discussions with you and governing your proposed development of Mellow Mushroom restaurants, but you then fail for any reason to sign the Development Rights Rider or a new Franchise Agreement before we terminate the Preliminary Agreement (unless we terminate for the reason in (b) above), we may keep $2,500 of the deposit to compensate our costs of preparing the Development Rights Rider and negotiating potential development rights with you. This $2,500 is in addition to the portion of the deposit we may keep, as described above, if you terminate the Preliminary Agreement after the 15 days after we sign it or we terminate the Preliminary Agreement under (c)(ii) or (d) above.

If you sign our Development Rights Rider because you commit to develop a minimum number of Mellow Mushroom restaurants in an area, we currently charge a development fee that you must pay in full when you sign the Development Rights Rider (less any deposit paid under the Preliminary Agreement). If you sign the Development Rights Rider together with a new Franchise Agreement for a new Restaurant (whether you are a new or an existing franchisee), the development fee due equals the full $50,000 initial franchise fee for the Restaurant covered by that Franchise Agreement plus a $25,000 deposit for each additional Restaurant you commit to develop. If you sign the Development Rights Rider to attach to an existing Franchise Agreement (that is, you are an existing franchisee) and do not concurrently sign a new Franchise Agreement for a new Restaurant, the development fee due is $25,000 for each Restaurant you commit to develop. In both situations, you must pay the rest of the initial franchise fee (that is, $25,000) for each Restaurant when you sign the Franchise Agreement for that Restaurant. We and you will determine the number of Restaurants you must develop, the deadlines for developing them, and the applicable development fee before signing the Development Rights Rider.

The development fee is not refundable under any circumstances. If you sign the Development Rights Rider, pay the development fee, and then cannot find sites for Mellow Mushroom restaurants or choose for another reason not to perform (and the Development Rights Rider is terminated), we may keep the entire development fee and need not return any money to you. You must pay us, as custodian, an art package fee when you sign the Franchise Agreement for an art package to be designed and created by us exclusively for your Restaurant, which work will be completed by one or more artists we choose whom you will commission directly for the project. The minimum art package fee is $7 per Restaurant square foot (not including patio square footage) (the “Art Package Fee”). We estimate the Art Package Fee will range from $28,000 to $38,500. If we and you expect the art package’s cost to exceed the Art Package Fee due to changes in the Restaurant’s square footage or the scope or nature of the art package, you must pay us as custodian, within 5 days after our demand, the full amount of that expected incremental cost. We will pay the artist or artists with whom you contract to design and create the art package according to invoices for the work submitted to you (with copies to us). If the art package’s actual, final cost is less than the Art Package Fee or the sum of the Art Package Fee plus the incremental costs you previously paid, we will promptly refund to you the amount you previously paid that exceeds the Art Package’s actual, final cost. The artwork package fee otherwise is not refundable. We currently charge up to $2,000 for each person to attend our Area Manager training program. (Item 11 describes when you must hire an Area Manager.) This payment is not refundable.

Item 8: Restrictions on Sources of Products and Services

Designated Suppliers. You must operate the Restaurant according to our standards and specifications, which may regulate, among other things, the types, models, and brands of fixtures, furniture, furnishings, equipment, signs, products, materials, and supplies you must use in operating the Restaurant; required or authorized products and services and product and service categories; product preparation, storage, handling, and packaging procedures; product inventory requirements; and designated or approved suppliers of these items. You must buy all of your tomato sauce/spice mix and pizza dough directly from a designated wholesaler that buys these products from Red Bud. There currently are (i) a designated supplier for all food products, cleaning supplies, and paper goods, (ii) separate designated suppliers for our retail merchandising program, and (iii) a separate designated supplier for our required technology systems, including components and software necessary for you to accept and process online orders and our gift and loyalty cards and to participate in our gift card, customer loyalty, affinity, and similar programs. We periodically may change these suppliers. There are no other goods, services, supplies, fixtures, equipment, inventory, computer hardware and software, real estate, or comparable items related to establishing or operating the Restaurant that you must buy or lease from us or a single designated supplier. Our officers do not own an interest in any thirdparty (unaffiliated) supplier.

Approved Suppliers. To maintain the quality of the goods and services Mellow Mushroom restaurants sell and our system’s reputation, you must buy or lease fixtures, furniture, equipment, supplies, furnishings, other food products (besides those mentioned above), uniforms, and similar items (and services) meeting our minimum standards and specifications and, for some items, from distributors or suppliers we approve or designate (which might include or be limited to us). If we approve distributors or suppliers or designate a distributor or supplier for an item or service, you must buy that item or service only from an approved distributor or supplier or only from the designated distributor or supplier, as applicable. Our standards and specifications may impose minimum requirements for delivery, performance, freshness, quality, reputation, design, and appearance. We will notify you in our Operations Manual or other communications of our standards and specifications and/or names of approved and designated distributors and suppliers. There might be situations where you may obtain items and services from any supplier that can satisfy our requirements and, therefore, would be an approved supplier. We currently are not an approved, direct supplier of any item. During the fiscal year ended September 30, 2019, Red Bud received $15,890,970 from selling tomato sauce/spice mix and pizza dough directly to our franchisees or to wholesalers that resold the products to our franchisees (this information is from Red Bud’s internal records and our year-end consolidated audited financial statements). In our fiscal year ended September 30, 2019, and according to the statement of earnings in our year-end audited financial statements, our consolidated revenue from all items Red Bud sold directly to our franchisees, or to wholesalers that resold the items to our franchisees, was $15,890,970, which is 37.8% of our total annual revenue of $42,091,232. We (and our affiliates) have the right to receive payments from suppliers on account of their actual and/or prospective dealings with you and other franchisees (and us) and to use these amounts without restriction for any purposes we deem appropriate (unless we agree otherwise with the supplier). We negotiate purchase arrangements with suppliers; these often include volume discounts. At various times, we have negotiated purchase arrangements with suppliers of soft drinks, salad dressings, canned goods, meats, and cheeses. Our negotiations seek to promote our franchise system’s overall interests and our interests as the franchisor (and not the interests of a particular franchisee). Some suppliers pay us fees for products purchased through these negotiated agreements. These fees are usually based on an amount per case of product ordered and generally range from $.10 to $1 per case. According to our internal records, during our 2019 fiscal year, we received $1,228,115 from approved suppliers on account of their sales of nonMellow Mushroom branded items to our franchisees, which is 2.9% of our total consolidated revenue of $42,091,232. We deposited these amounts directly into the Brand Development Fund. We also receive license fees from suppliers, some of which we license to imprint the Marks on paper goods and other items sold to our franchisees. According to our internal records, during our 2019 fiscal year, we received $1,586,359 in license fees from suppliers of Mellow Mushroom-branded and non-branded items, which is 3.8% of our total consolidated revenue of $42,091,232. (This $1,586,359 does not include the $1,228,115 referenced above.) If you want to use any item or service we have not yet evaluated or to buy or lease from a supplier we have not yet approved, you first must submit sufficient information, specifications, and samples so we can determine whether the item or service complies with our standards or the supplier meets approved supplier criteria. We may charge you a reasonable fee to cover our costs to make this decision (see Item 6) and will decide within a reasonable time (typically 30 to 60 days). We periodically will establish procedures for you to request approval of items, services, and suppliers. We may limit the number of approved items, services, and suppliers. We may require you to buy goods and services only from us or a designated distributor or supplier at prices determined at that time. Supplier approval might depend on product quality, frequency of delivery, standards of service, and willingness to pay us for the right to do business with our system. Approval may be temporary until we evaluate the supplier in more detail. We may inspect a proposed supplier’s facilities during and after the approval process to make sure the supplier continues meeting our standards. If it does not, we may revoke our approval by notifying the supplier and you in writing. Suppliers must agree in writing to follow our rules for trademark use and preparing materials. We need not accept any proposed supplier of an item or service if we already have designated or approved a single supplier or a limited number of suppliers for the item or service, even if we or an affiliate is the designated or approved supplier.

Insurance. Besides the purchases and leases described above, you must obtain and maintain, at your own expense, the insurance coverage that we and the Restaurant’s lease periodically require and meet other insurance-related obligations. You currently must have general liability insurance of at least $1 million per occurrence, $2 million in the aggregate, products liability insurance, workers’ compensation insurance required by law, and employment practices liability insurance (EPLI). (You may wish to obtain greater insurance coverage if you own the Restaurant’s underlying real estate.) Premiums depend on the insurance carrier’s charges, payment terms, and your history. All insurance policies (except for EPLI, unless we require otherwise) must name us as an additional insured party for claims arising from the Restaurant’s operation. We must receive at least 10 days’ prior notice of cancellation of coverage.

Advertising Materials. Before you use them, you must send us for approval samples of all advertising, promotional, and marketing materials and novelty items we have not prepared or previously approved within the past 12 months. If you do not receive written disapproval within 15 days after we receive the materials or items, they are approved. You may not use any materials or items we have not approved or have disapproved.

Art Package. As described in Item 5, you must purchase an art package designed exclusively for your Restaurant.

Restaurant Design. We will give you our requirements for the Restaurant’s design, layout, furniture, fixtures, equipment, color scheme, and signs. You must pay all costs to develop the Restaurant. We will arrange for you to hire an architect and engineer to prepare site and architectural plans for your Restaurant. You must obtain your landlord’s approval of the plans (if you lease rather than own the Restaurant’s premises) and any required construction permits. You must use the architect and engineer we select. We must review and accept final plans and specifications before you begin constructing the Restaurant. We must review and accept any changes to these plans before you implement the change. We may inspect the Restaurant during its development and require reasonable alterations to make sure it complies with our plans and specifications.

Restaurant Construction and Permits. You must hire engineers and others to construct the Restaurant according to the architectural and site plans. You must hire a licensed general contractor to perform construction work at the Restaurant. You must use the general contractor we select. If we do not select a particular general contractor, you must submit a general contractor and the general contractor agreement for our approval. You may not hire a general contractor we have not approved. You must obtain all permits, licenses, and other governmental approvals necessary to construct and operate the Restaurant. Unless we otherwise agree in writing, you must have a valid liquor/pouring license (including distilled spirits, beer, and wine) to open and operate the Restaurant.

Site Selection. The Restaurant must be at a site we accept. We also must accept the site’s lease or sublease (if you lease rather than own the Restaurant’s premises), which must contain certain required terms. You must collaterally assign to us the lease or sublease as security for timely performing your obligations under the Franchise Agreement and obtain the lessor’s consent to the collateral assignment. This means that, if you do not fulfill your obligations, we may take over the premises. Our required lease terms and collateral assignment appear in the Rider and Special Stipulations attached to the Preliminary Agreement.

Gift Card and Similar Programs. You must issue and honor/redeem gift certificates, coupons, and gift, loyalty, and affinity cards for Mellow Mushroom restaurants and participate in, and comply with the requirements of, our gift card and other customer loyalty, affinity, and similar programs. We may have the Brand Fund pay some of the costs of the third-party vendor we hire to administer the Mellow Mushroom System’s brand loyalty program. To the extent the Brand Fund does not cover those costs, franchisees must pay them directly to the vendor (unless we use a technology fee to cover some of them). We may implement and change our practice in this area when we deem best. The Development Rights Rider does not require you to buy or lease from us (or our affiliates), our designees, or approved suppliers, or according to our specifications, any goods, services, supplies, fixtures, equipment, inventory, computer hardware and software, real estate, or comparable items. You must give us information and materials we request regarding each site at which you propose to operate a Restaurant so we can assess and accept that site. Collectively, the purchases and leases described above represent almost 100% of your total purchases and leases to establish and then operate the Restaurant. Except as described above, we currently do not derive revenue or other material consideration from required purchases or leases. There currently are no purchasing or distribution cooperatives. We do not provide material benefits to a franchisee for purchasing particular products or services or using particular suppliers.

Item 10: Financing

We do not offer direct or indirect financing. We do not guarantee your note, lease, or other obligation.

Item 12: Territory

Franchise Agreement You will operate the Restaurant at a specific location we first must accept. You will have an exclusive territory (the “Exclusive Territory”) equal to a 1-mile radius from the Restaurant’s front entrance within which we will not locate or allow another franchisee to locate another Mellow Mushroom restaurant. You may not operate the Restaurant from another site without our prior written consent, although you may deliver the Restaurant’s products outside the Exclusive Territory if you follow our standards and specifications (including engaging with third-party food ordering and delivery systems only in the manner we permit). However, you may not use other distribution channels, such as Internet and catalog sales (although you may advertise on the Internet with our prior written consent). You may advertise and market your Restaurant outside the Exclusive Territory. Whether or not we will allow relocation depends on circumstances at the time and what is in the Restaurant’s and our system’s best interests. Factors include, for example, the proposed market area, its proximity to other Restaurants, whether you are complying with your Franchise Agreement, whether you properly de-identify the old location, and how long it will take you to open the new location. Except as described below under “Development Rights Rider,” you have no options, rights of first refusal, or similar rights to acquire additional franchises within your Exclusive Territory or in contiguous territories. While no other Mellow Mushroom restaurant will be physically located within your Exclusive Territory, we (and our affiliates) otherwise are not restricted in the business activities in which we may engage. We retain the right to (a) establish, and allow other franchisees to establish, Mellow Mushroom restaurants at any location outside the Exclusive Territory (including at the boundary of the Exclusive Territory) and on any terms and conditions we deem appropriate, (b) allow Mellow Mushroom restaurants located outside the Exclusive Territory to deliver products to customers located inside the Exclusive Territory, (c) sell products and services identical or similar to, or dissimilar from, the products and services your Restaurant sells, whether identified by the Marks or other trademarks or service marks, through retail stores (other than Mellow Mushroom restaurants) located within the Exclusive Territory and through any other distribution channels located and/or operating within the Exclusive Territory (including the Internet, catalog sales, telemarketing, and other direct marketing), and (d) engage in all other business activities not expressly prohibited by the Franchise Agreement. We need not compensate you if we engage in these activities. Although we have the right to do so (as noted above), we have not established (and have no current plans to establish) other franchises or company-owned outlets or another distribution channel selling or leasing similar products or services under a different trademark. Continuation of your territorial exclusivity does not depend on your achieving a certain sales volume, market penetration, or other contingency. We may not alter the definition of your Exclusive Territory without your consent (except when you acquire a successor franchise, in which case we also may eliminate the Exclusive Territory).

Development Rights Rider You may (if you qualify) develop and operate a number of Mellow Mushroom restaurants within a specific area (the “Area”). We and you will identify the Area in the Development Rights Rider before signing it. The Area typically is a city, cities, or counties. We base the Area’s size primarily on the number of Mellow Mushroom restaurants you agree to develop, demographics, and site availability. We and you will negotiate the number of Restaurants you must develop, and the deadlines for development, to keep your development rights. We and you then will complete the schedule in the Development Rights Rider before signing it. While the Development Rights Rider is in effect, we (and our affiliates) will not establish, or grant others the right to establish, other Mellow Mushroom restaurants having their physical locations within the Area. There are no other restrictions on us (or our affiliates). You may not develop or operate Mellow Mushroom restaurants outside the Area. We may terminate the Development Rights Rider if you do not satisfy your development obligations. We will accept proposed locations for your additional Restaurants only if they meet our then-current standards for Restaurant sites. Despite the development schedule under the Development Rights Rider, we may delay your development of additional Mellow Mushroom restaurants within the Area if we believe, when you apply for the next Restaurant, that you are not yet operationally, managerially, or otherwise prepared (given the time that has passed since you developed and opened your most recent Mellow Mushroom restaurant) to develop, open, and/or operate the additional Restaurant according to our standards and specifications. We may delay additional development if the delay will not in our reasonable opinion cause you to breach your development obligations under the development schedule (unless we are willing to extend the schedule to account for the delay). Except as described above, continuation of your territorial exclusivity does not depend on your achieving a certain sales volume, market penetration, or other contingency. We may not alter your Area during the Development Rights Rider’s term.

Item 15: Obligation to Participate in the Actual Operation of the Franchise Business

During the entire franchise term, one of your owners must be designated your “Managing Owner,” responsible personally for devoting his or her full time and best efforts to the Restaurant’s construction, development, and operation and to whom we may give direction, and from whom we may receive feedback, on matters other than matters relating to labor relations and employment practices. You will identify your Managing Owner in the Franchise Agreement before signing it. The Managing Owner must complete our training program. (See Item 11) If the Managing Owner transfers his or her ownership interest in you (with our approval) during the franchise term, you must designate a new Managing Owner (whom we must approve), and have that new Managing Owner attend and satisfactorily complete our full training program, within the timeframe we specify. Your Restaurant must at all times be under the direct supervision of your Managing Owner or an approved manager who has successfully completed training. The Managing Owner and/or the Restaurant’s manager must devote sufficient time and attention to perform their duties. Restaurant employees are under your control in implementing and maintaining Mellow Mushroom System standards at the Restaurant during operating hours. (Item 11 discusses our Area Manager and dedicated marketing resource requirements if you and/or your affiliates operate 3 or more Restaurants.)

You may designate any number of assistant managers. You may replace any manager or assistant manager at any time if you notify us of the change when it occurs. We may require new managers or assistant managers to complete our training program. Managers and assistant managers need not have an ownership interest in the Restaurant or you but must agree in writing to preserve confidential information to which they have access and not to compete with the Mellow Mushroom system. We do not control the terms or forms of employment agreements you use with Restaurant employees and are not responsible for your labor relations or employment practices.

You have sole responsibility and authority for your labor relations and employment practices, including, among other things, employee selection, promotion, termination, hours worked, rates of pay, other benefits, work assigned, discipline, adjustment of grievances and complaints, and working conditions. You must communicate clearly with Restaurant employees in employment agreements, human resources manuals, written and electronic correspondence, paychecks, and other materials that you (and only you) are their employer and that we, as the franchisor of Mellow Mushroom Restaurants, and our affiliates are not their employer and do not engage in any employer-type activities (including those described above) for which only you are responsible. You also must obtain an acknowledgment (in the form we specify or approve) from all Restaurant employees that you (and not we or our affiliates) are their employer.

If you are a corporation, limited liability company, or other entity, your owners must personally guarantee your obligations under the Franchise Agreement and agree to be personally bound by, and personally liable for the breach of, all monetary and non-monetary obligations in the Franchise Agreement, including the confidentiality and non-compete obligations. This “Guaranty and Assumption of Obligations” is part of the Franchise Agreement. If we do not require an owner with a small investment in you to sign the full Guaranty, that owner still must comply with all non-monetary obligations in the Franchise Agreement as if he or she were the franchisee, including the confidentiality and non-compete obligations. Your officers and directors also must comply with this requirement. Our standard “Principal’s Agreement” is Exhibit F.

Item 16: RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL

You must offer all products and services we periodically require for Mellow Mushroom restaurants. You may not offer any products or services we have not authorized. Our standards may regulate required or authorized products and services, product and service categories, and product inventory requirements. We periodically may change required and/or authorized products and services and product and service categories. There are no limits on our right to do so. We have the right, to the fullest extent allowed by law, to establish maximum, minimum, or other prices for your products and services. There are no restrictions on the customers with whom your Restaurant may do business.

To view the full Franchise Disclosure Document, please click here