Explanation

This risk was not identified in the FDD package. Item 20 data does not show any franchised unit terminations, non-renewals, or cessations of operation for other reasons over the last three years. Generally, high turnover can be a major red flag, potentially indicating systemic issues such as franchisee unprofitability, dissatisfaction with support, or an unviable business model. Careful analysis of Item 20 tables is a critical part of franchisee due diligence.

Potential Mitigations

• Your business advisor should help you calculate turnover rates from Item 20 and compare them to industry averages.
• Speaking with former franchisees, if any are listed, is a crucial due diligence step your attorney can help you prepare for.
• An accountant can help you analyze the footnotes in Item 20 to understand how the franchisor classifies different types of departures.

Explanation

The franchise system is small and has grown from two to five operating franchised units over the past two years. While this growth rate is not inherently rapid, it must be considered alongside the franchisor's weak financial condition. Expanding the system requires significant capital and personnel for support. The franchisor's limited resources could potentially be strained by adding new franchisees, which may affect the quality of support available to you.

Potential Mitigations

• A thorough discussion with current franchisees about the quality and timeliness of the support they currently receive is recommended.
• Your business advisor can help you question the franchisor about their specific plans to scale support infrastructure to match their growth projections.
• Have your accountant review the franchisor's financials to assess if they have the cash flow to properly support new and existing units.

Explanation

This risk was not identified in the FDD package. The executive team appears to have relevant experience in the restaurant industry dating back to 2018 or earlier. Generally, inexperienced management can be a significant risk, as it may lead to underdeveloped support systems, poor strategic decisions, and an inability to effectively guide franchisees. Assessing the franchising and industry-specific track record of key personnel in Item 2 is an important due diligence step.

Potential Mitigations

• It is always a good practice to research the professional backgrounds of the key executives listed in Item 2.
• A business advisor can help you formulate questions for the franchisor about the management team's direct experience in supporting a franchise network.
• Discussing the management team's reputation and effectiveness with existing franchisees provides valuable insight.

Explanation

This risk was not identified in the FDD package. Item 1 indicates the franchisor is a wholly owned subsidiary of Aloha Poke Holdings LLC, with no disclosure of outside private equity ownership. When a franchisor is owned by a private equity firm, there can be a risk that decisions are focused on short-term investor returns rather than the long-term health of franchisees. This can sometimes manifest in reduced support or increased fees.

Potential Mitigations

• Your attorney should always confirm the ownership structure disclosed in Item 1 of the FDD.
• If private equity ownership were present, a business advisor could help you research the firm’s reputation and track record with other franchise brands.
• Speaking with franchisees who have experience with private equity-owned systems can offer general insights.

Explanation

This risk was not identified in the FDD package, as Item 1 states that the franchisor has no predecessors. Generally, a predecessor is a company from which the franchisor acquired the business. If a predecessor had a history of litigation, bankruptcy, or high franchisee failure rates, it could indicate underlying problems with the system that may have been inherited by the current franchisor. A thorough review of Item 1 is always important.

Potential Mitigations

• Your attorney should always verify the predecessor information disclosed in Item 1 of the FDD.
• If a predecessor were disclosed, researching their business history and reputation would be a key task for your business advisor.
• It is good practice to ask long-tenured franchisees about their experience under any previous ownership.

Explanation

This risk was not identified in the FDD package, as Item 3 discloses no reportable litigation. A pattern of lawsuits, particularly actions brought by franchisees alleging fraud or misrepresentation, can be a major red flag. It may suggest systemic problems with the franchisor's sales process, disclosure quality, or franchisee relations. Likewise, a high number of lawsuits brought by the franchisor against franchisees could indicate an overly aggressive or litigious culture.

Potential Mitigations

• A franchise attorney should always be engaged to carefully review the nature, status, and outcomes of any litigation disclosed in Item 3.
• It is wise to ask existing franchisees about the franchisor's general approach to resolving disputes.
• Your business advisor can help assess whether the number and type of lawsuits are typical for a system of its size and age.