Explanation

This risk was not identified in the FDD package. Rapid system growth can be a concern when a franchisor expands faster than their ability to build support infrastructure. This can strain resources, leading to inadequate training, site selection assistance, and ongoing operational support for new franchisees, potentially harming the entire system's quality and reputation.

Potential Mitigations

• An accountant should review the franchisor's financial statements to assess if they have the capital and cash flow to support their growth plans.
• Engaging a business advisor to question the franchisor about their plans for scaling support infrastructure is a valuable step.
• Speaking with both new and established franchisees can provide insight into whether support quality is keeping pace with growth.

Explanation

This risk was not identified in the FDD package. A fad business is one tied to a fleeting trend, lacking long-term sustainable consumer demand. Investing in such a franchise is risky because your long-term contractual obligations, such as royalty payments, continue even if public interest in the product or service disappears. This can lead to declining sales and business failure.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term demand for the services offered.
• Evaluating the franchisor’s plans for innovation and adaptation to changing market trends is a prudent step.
• Consider the business model's resilience to economic shifts and its core value proposition beyond current trends with your financial advisor.

Explanation

This risk was not identified in the FDD package. Key executives having limited experience in franchising or in the specific industry can be a significant risk. It may lead to underdeveloped support systems, a lack of understanding of franchisee needs, and poor strategic decisions. Evaluating the management team's background in Item 2 is crucial to assess their capability to lead a franchise system effectively.

Potential Mitigations

• Your business advisor can help you thoroughly vet the specific franchising and industry experience of each executive listed in Item 2.
• It is wise to ask existing franchisees about their direct experiences with the management team's competence and support.
• If management is new to franchising, inquiring with a business advisor about whether they have retained experienced franchise consultants is important.

Explanation

This risk was not identified in the FDD package. When a franchisor is owned by a private equity firm, there's a risk that decisions may prioritize short-term investor returns over the long-term health of the system. This can manifest as cuts in franchisee support, increased fees, or pressure to use affiliated vendors. The firm's typical exit timeline can also create uncertainty about future ownership and system philosophy.

Potential Mitigations

• A business advisor can help you research the private equity firm’s reputation and track record with other franchise systems.
• It's important to ask current franchisees about any changes to the system since the private equity acquisition.
• Your attorney should review the Franchise Agreement for clauses that permit the franchisor to sell the system and understand the implications for you.

Explanation

This risk was not identified in the FDD package. The FTC Rule requires franchisors to disclose parent companies. If the parent is financially responsible for the franchisor, its financials may also need to be disclosed. Failure to do so can hide the true financial health and stability of the entity backing your franchise, preventing a complete risk assessment.

Potential Mitigations

• If the franchisor is a subsidiary or newly formed entity, an attorney can help investigate the corporate structure.
• Your accountant should confirm that if a parent company guarantees the franchisor's performance, its financial statements are included and reviewed.
• It is important to understand the legal and financial relationship between the franchisor and any parent entity with your attorney.

Explanation

This risk was not identified in the FDD package. Franchisors must disclose information about their predecessors in Item 1. If this history, which could include past litigation, bankruptcies, or high franchisee turnover, is not fully disclosed, a prospective franchisee may be unaware of systemic issues inherited by the current franchisor. This can obscure a full understanding of the brand's track record and potential challenges.

Potential Mitigations

• An attorney should carefully review Item 1 for any mention of predecessors and cross-reference with Items 3 and 4 for litigation and bankruptcy history.
• A business advisor can assist in researching a predecessor's public track record if the franchise system was acquired.
• Asking long-term franchisees about their experiences under any previous ownership can provide valuable context.