Explanation

The financial statements for 7-Eleven, Inc. (7-Eleven) and its subsidiaries show it is a very large, financially stable company with significant profits and positive net worth. However, net earnings have declined over the last three years, and the company disclosed a plan in July 2024 to close or convert approximately 440 underperforming stores. While overall financial stability risk is low due to its scale, these factors could suggest potential challenges in the retail segment.

Potential Mitigations

• Your accountant should review the consolidated financial statements, including all notes, to understand the franchisor's financial condition and performance trends.
• Discuss the declining profitability and store closures with your business advisor to evaluate their potential impact on system support and resources.
• Ask the franchisor about their strategies to address declining profits and how they will support franchisees moving forward.

Explanation

This risk was not identified in the FDD Package. The system is mature and its total number of outlets has been stable or slightly declining in recent years, rather than growing rapidly. Rapid growth can strain a franchisor's ability to provide adequate support to all units.

Potential Mitigations

• An accountant can help you analyze the outlet summary tables in Item 20 to understand the system's growth trajectory over the past three years.
• In discussions with current franchisees, a business advisor can help you ask about the quality and timeliness of support services.
• Your attorney should review the franchisor's obligations for providing support as the system evolves.

Explanation

This risk was not identified in the FDD Package. 7-Eleven is one of the oldest, largest, and most established franchise systems in the world, having franchised since 1964. An unproven system presents higher risks related to the business model's viability and the franchisor's ability to provide support.

Potential Mitigations

• When evaluating any franchise, your attorney should confirm the business and franchising experience disclosed in Items 1 and 2.
• A business advisor can help you research the history and track record of a franchise system before you invest.
• Speaking with the earliest franchisees in a system can provide insight into its evolution and the franchisor's capabilities.

Explanation

This risk was not identified in the FDD Package. The convenience store industry is a long-established and staple retail sector, not a business model based on a fleeting trend. A fad-based business carries a high risk that customer demand will disappear, potentially leaving you with a worthless business but ongoing contractual obligations.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term consumer demand for a franchise's products or services.
• It is wise to evaluate a franchisor's plans for innovation and adaptation to changing consumer tastes.
• Your financial advisor can help assess a business model's resilience to economic shifts and changing trends.

Explanation

This risk was not identified in the FDD Package. The officers and directors listed in Item 2 have extensive, long-term experience with 7-Eleven and within the convenience store and retail industries. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions and inadequate franchisee support.

Potential Mitigations

• When considering a franchise, having your business advisor help you research the backgrounds of the key management team is a critical due diligence step.
• Speaking with current franchisees about their direct experiences with the management team's competence and support is highly recommended.
• Your attorney can help you understand the experience and qualifications of the people who will be supporting your business.

Explanation

This risk was not identified in the FDD Package. Item 1 indicates 7-Eleven, Inc. is part of a corporate structure ultimately controlled by Seven & i Holdings Co., Ltd., a large, publicly-traded Japanese corporation, not a private equity firm. PE ownership can sometimes introduce a focus on short-term returns over the long-term health of the system.

Potential Mitigations

• Your attorney should always help you identify the ultimate ownership structure of the franchisor in Item 1.
• Researching the ownership entity's history and track record with other brands can provide valuable insight.
• Speaking with franchisees about any changes in system direction after an ownership change is a prudent step.

Explanation

This risk was not identified in the FDD Package. The franchisor's complex corporate structure, including its parent companies SEJ Asset Management & Investment Company and the ultimate parent Seven & i Holdings Co., Ltd., is disclosed in Item 1. The franchisor itself has substantial, audited financial statements provided in Item 21, so the parent company's financials are not required to be disclosed under the FTC Rule.

Potential Mitigations

• Your attorney should review Item 1 to understand the full corporate structure, including all parent and affiliate entities.
• An accountant can determine if the provided financial statements in Item 21 are sufficient or if parent company financials should have been included.
• Clarifying any guarantees provided by a parent company is an important step for your legal counsel to take.

Explanation

This risk was not identified in the FDD Package. Item 1 explicitly states that the franchisor has no predecessors that are required to be disclosed. A predecessor is a company from which the franchisor acquired a major portion of its assets, and a lack of disclosure about them can hide a troubled history.

Potential Mitigations

• When evaluating a franchise, your attorney should always check Item 1 for any disclosed predecessors.
• If predecessors are disclosed, a business advisor can help you research their history, including any past litigation or bankruptcy.
• Speaking with long-term franchisees about their experience under any prior ownership can provide valuable context.