Explanation

This risk was not identified in the FDD Package. As a new system with no operating franchisees, there is no history of franchisee turnover to analyze in Item 20. For established systems, a high rate of terminations, non-renewals, or stores ceasing operation can be a major red flag indicating potential problems with profitability, support, or the overall business model. A prospective franchisee should always analyze this data carefully.

Potential Mitigations

• When evaluating an established franchise, it is crucial to have your accountant calculate the actual franchisee turnover rate from Item 20 data.
• Speaking with a significant number of former franchisees listed in the FDD is a key due diligence step a business advisor can help you prepare for.
• Your attorney can help you understand the definitions used in Item 20 to see if closures are being masked as transfers.

Explanation

This risk was not identified in the FDD Package. Item 20 shows the system has not yet begun selling franchises, so there is no data indicating rapid growth. For other systems, extremely fast expansion can strain a franchisor's resources, potentially leading to a decline in the quality and availability of essential support services, training, and site selection assistance for new and existing franchisees.

Potential Mitigations

• In other opportunities, your accountant should analyze the franchisor's financial statements to see if they have the capital to support rapid expansion.
• Engaging a business advisor to question the franchisor about their infrastructure for scaling support is a wise step.
• Contacting a range of new and old franchisees could reveal if support quality has suffered during growth.

Explanation

This risk was not identified in the FDD Package. The business concept is operating a pizza store, which is a long-established and mainstream segment of the restaurant industry, not a temporary trend. A fad business carries the risk that consumer interest could decline rapidly, potentially leaving you with a worthless business and ongoing contractual obligations long after the trend has passed.

Potential Mitigations

• For other franchise opportunities, a business advisor can help you research the long-term market demand for the product or service.
• Investigating the franchisor’s plans for product innovation and adaptation is important to gauge resilience to changing tastes.
• An accountant can help you model the financial sustainability of a business beyond its current popularity.

Explanation

This risk was not identified in the FDD Package. Item 1 does not indicate that the franchisor is owned or controlled by a private equity firm. When PE firms own franchisors, there can be a risk that short-term financial goals and a rapid exit strategy are prioritized over the long-term health of the brand and the profitability of individual franchisees.

Potential Mitigations

• When considering a PE-owned brand, a business advisor can help research the firm's history with other franchise systems.
• Your attorney should analyze the assignment clauses in the Franchise Agreement to understand your rights if the system is sold.
• Discussions with franchisees who have been with the system before and after a PE acquisition can provide valuable insight.

Explanation

This risk was not identified in the FDD Package. Item 1 clearly states that Pizza Now LLC does not have a parent company. In situations where a franchisor is a thinly capitalized subsidiary, the failure to provide financial statements for a parent company that guarantees its obligations or is a critical supplier can obscure a full picture of the system's overall financial health and stability.

Potential Mitigations

• In other cases, your attorney should verify the franchisor's corporate structure and determine if a parent entity exists.
• If a parent guarantee is provided, it is essential that your accountant reviews the parent's financial statements.
• Your attorney can advise on whether the absence of parent financials, when they appear to be required, constitutes a disclosure violation.

Explanation

This risk was not identified in the FDD Package. Item 1 states that the franchisor does not have any predecessors. In cases where a franchisor has acquired the system from a predecessor, it is important to investigate the predecessor's history for issues like litigation, bankruptcy, or high franchisee turnover, as these could indicate inherited problems with the brand or its business model.

Potential Mitigations

• If a predecessor is disclosed, ask your attorney to carefully review their history as detailed in Items 1, 3, and 4.
• A business advisor can assist with independent research into a predecessor's reputation and historical performance.
• Questioning long-term franchisees about their experience under previous ownership can offer valuable context.

Explanation

This risk was not identified in the FDD Package. Item 3 states that there is no litigation that requires disclosure. A pattern of lawsuits filed by franchisees against a franchisor alleging fraud, misrepresentation, or breach of contract can be a significant red flag. Likewise, a high number of lawsuits initiated by the franchisor against its franchisees may suggest an overly aggressive or litigious culture.

Potential Mitigations

• When litigation is disclosed, having your attorney analyze the nature, frequency, and outcomes of the cases is crucial.
• For serious allegations, your attorney may suggest obtaining copies of the actual court filings for deeper insight.
• A business advisor can help you formulate questions for current and former franchisees about any disclosed litigation.