Explanation

Based on Item 20 data, the system has not experienced any franchisee terminations, non-renewals, or other cessations of business in the last three years. High turnover can be a red flag for systemic problems, so its absence is positive. However, the very small number of franchised units means this data has limited predictive value for system health.

Potential Mitigations

• Your business advisor should help you analyze the reasons for the slow franchise growth noted in Item 20.
• It is critical to speak with all current franchisees to understand their satisfaction and profitability.
• You should continue to monitor franchisee turnover rates in future FDDs if you become a franchisee.

Explanation

This risk was not identified in the FDD package. Rapid growth can strain a franchisor's ability to provide adequate support. While this franchisor is not growing rapidly on the franchise side, monitoring the pace of both company-owned and franchised expansion against the support system's capacity is a prudent step for any franchisee.

Potential Mitigations

• Questioning a franchisor about its capacity and plans for scaling its support infrastructure is a key due diligence step a business advisor can assist with.
• Interviewing a broad range of existing franchisees about the current quality and responsiveness of franchisor support provides valuable insight.
• An accountant's review of the franchisor's financials can help assess if they have the resources to support future growth.

Explanation

This risk was not identified in the FDD package. The business model, a bakery cafe, is well-established in the food service industry. However, any business concept can be subject to shifting consumer tastes. A prospective franchisee should always consider the long-term sustainability and demand for a franchise's core products or services in their specific market.

Potential Mitigations

• Assessing the long-term market demand for the product or service independently with your business advisor can determine if it is a sustainable need or a novelty.
• Evaluating a franchisor's plans for innovation, adaptation, and staying relevant is a critical part of due diligence.
• Consider the sustainability of the business model beyond current trends with help from your financial advisor.

Explanation

This risk was not identified in the FDD package. The management team appears to have extensive experience with the affiliated company-owned stores and in the food and beverage industry. In general, inexperienced franchisors may lack proven systems or an adequate support infrastructure, so it is important to vet the team's specific experience in franchising, not just in the industry itself.

Potential Mitigations

• Thoroughly vetting the management team's background and relevant experience in both the specific industry and in managing a franchise system is a wise step to take with a business advisor.
• Speaking with existing franchisees about the quality of support and management's responsiveness is crucial.
• Assessing whether a franchisor has engaged experienced franchise consultants or staff can be important if the team is new to franchising.

Explanation

This risk was not identified in the FDD package. The franchisor does not appear to be owned by a private equity firm. When a PE firm owns a franchisor, there can be a risk that decisions prioritize short-term investor returns over the long-term health of the franchise system. This can sometimes manifest as cost-cutting in franchisee support or pressure to use affiliated vendors.

Potential Mitigations

• It is wise to research the track record of any private equity firm with other franchise systems they have owned.
• Talking to franchisees about any changes in support, fees, or system direction since a PE acquisition can provide valuable insight.
• Your attorney can help assess any restrictions on the franchisor's right to assign the agreement if the system is sold.

Explanation

This risk was not identified in the FDD package. The franchisor states in Item 1 that it has no predecessors. When a franchisor does have a predecessor, it is important to review that entity's history regarding litigation, bankruptcy, and franchisee turnover, as past issues can sometimes carry over to the new entity and affect the system's health and stability.

Potential Mitigations

• Your attorney should always carefully review any predecessor information disclosed in Items 1, 3, and 4 of the FDD.
• If a system was acquired from a predecessor, independent research on the predecessor's track record can be a valuable task for your business advisor.
• Asking long-term franchisees about their experience under any predecessors can provide important context.

Explanation

This risk was not identified in the FDD package. The franchisor states in Item 3 that no litigation is required to be disclosed. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, can be a significant red flag indicating systemic problems. Similarly, a high volume of lawsuits initiated by the franchisor against franchisees might suggest an overly aggressive or punitive relationship.

Potential Mitigations

• Your attorney should always carefully review the details of any disclosed litigation in Item 3.
• Independent legal research on disclosed cases, with assistance from your attorney, can provide additional context.
• Treating any pattern of fraud claims or an unusually high volume of litigation as a major red flag is a prudent approach.