Explanation

The risk of a franchisor expanding too quickly, potentially straining its support systems, was not identified. Item 20 data does not show excessively rapid growth relative to the system's size over the past three years. However, you should remain aware that if a franchisor's growth outpaces its ability to provide training, site selection, and operational support, it can negatively affect all franchisees in the system. Careful monitoring of system growth is always prudent.

Potential Mitigations

• A business advisor can help you evaluate whether the franchisor's current support infrastructure appears adequate for its planned growth.
• In your discussions with current franchisees, it is a good practice to ask about the quality and timeliness of the support they receive.
• Your accountant can review the franchisor's financials to assess if they have allocated sufficient resources to support franchisee services.

Explanation

This specific risk was not identified in the FDD package. The core business, offering frozen yogurt, is a well-established concept rather than a new or fleeting trend. However, any retail concept can be subject to shifting consumer tastes. A prospective franchisee should always consider the long-term market viability and the franchisor's ability to innovate and adapt to changing preferences. A business that fails to evolve risks becoming obsolete regardless of its initial popularity.

Potential Mitigations

• Engaging a business advisor to research long-term consumer trends in the frozen dessert and broader quick-service food industry is a wise step.
• When speaking with the franchisor, inquire about their research and development process and plans for future product and service innovation.
• Discuss the business model's resilience to economic shifts and changing consumer tastes with your financial advisor.

Explanation

This risk was not identified in the FDD package. Item 1 does not indicate that the franchisor is owned by a private equity firm. This type of ownership can sometimes lead to a focus on short-term profitability over the long-term health of the franchise system. Prospective franchisees should always understand the franchisor's ownership structure and the goals of its owners, as these can influence decisions regarding fees, support, and strategic direction, which directly affect franchisee success.

Potential Mitigations

• A business advisor can assist you in researching a franchisor's ownership structure and the track record of its principal owners.
• It is always prudent to ask existing franchisees if they have observed any changes in franchisor behavior or support levels following ownership changes.
• Your attorney can review the assignment clauses in the Franchise Agreement to determine how easily the brand can be sold to a new owner.

Explanation

This risk was not identified in the FDD package. Item 1 does not mention any parent company, and the franchisor entity appears to be a standalone company. In some cases, a franchisor might be a thinly capitalized subsidiary of a larger, more stable parent. The FTC Rule may require the parent's financial statements to be disclosed in such cases to provide a complete picture of the financial backing of the franchise system. Without them, risk could be understated.

Potential Mitigations

• Your attorney can help you research the corporate structure of the franchisor to confirm there are no undisclosed parent companies or influential affiliates.
• An accountant should always review the provided financial statements to assess if the franchisor entity appears adequately capitalized on its own.
• It is good practice to ask the franchisor directly about its corporate structure and any parent or affiliated companies that provide support.

Explanation

16 Handles LLC acquired its assets from a predecessor, Yo Fresh Inc., in 2022. While Items 3 and 4 do not disclose any litigation or bankruptcy for the predecessor, you are inheriting a system with a prior history. The success and challenges of the system under its previous owner can influence its current state and future prospects. It is important to understand this history, as you are buying into an established brand, not a brand new one.

Potential Mitigations

• It is beneficial to speak with long-term franchisees who operated under the predecessor to understand the system's history and any changes since the acquisition.
• A business advisor can help you research the reputation and history of the predecessor entity for a more complete picture.
• Your attorney should confirm that the asset purchase agreement did not transfer any undesirable liabilities to the new franchisor entity.

Explanation

This risk was not identified in the FDD package, as Item 3 states, "No litigation is required to be disclosed in this Item." The absence of litigation against the franchisor, especially claims of fraud or misrepresentation from other franchisees, is a positive indicator. However, this does not guarantee future disputes will not arise. It is always important for a prospective franchisee to understand the legal health of a franchise system and the franchisor's approach to resolving conflicts.

Potential Mitigations

• While no litigation is disclosed, it is still prudent to ask current franchisees about their relationship with the franchisor and how disputes are handled.
• Your attorney can conduct an independent search for litigation that may not have met the specific disclosure requirements for Item 3.
• A business advisor can help you assess the franchisor's general reputation within the franchise community.