Explanation

This risk was not identified in the FDD package. Rapid system growth can strain a franchisor's ability to provide adequate support to all franchisees. If a franchisor's support staff, supply chain, and quality control measures do not keep pace with unit growth, it can lead to inconsistent brand standards and insufficient help for new and existing franchisees, potentially harming the entire system's reputation and your individual business.

Potential Mitigations

• Questioning the franchisor about their plans for scaling support infrastructure to match unit growth can be a key part of your due diligence.
• A business advisor can help you analyze the ratio of support staff to franchisees to gauge the adequacy of the support system.
• Your accountant should review the franchisor's financials to assess if they have the resources to support growth.

Explanation

This risk was not identified in the FDD package. Applebee's LLC is an established and mature franchise system, not a new or unproven one. Investing in a new system carries higher risk because the business model may be unproven, brand recognition is low, and the franchisor may lack experience in providing franchisee support. These factors can lead to a higher rate of failure for new franchisees.

Potential Mitigations

• For any new franchise system, it is crucial to conduct extensive due diligence on the founders' and management's experience in both the industry and in franchising.
• Speaking with the very first franchisees to open can provide critical insights into the system's early challenges and the franchisor's responsiveness.
• A business advisor can help assess whether the concept has long-term viability or is based on a short-term trend.

Explanation

This risk was not identified in the FDD package. Applebee's is a long-established brand in the casual dining sector and does not appear to be based on a fad. A fad business is one that experiences a sudden burst of popularity that quickly fades. Investing in such a concept is risky because your long-term contractual obligations, like royalty payments, continue even after consumer interest has moved on, potentially leading to business failure.

Potential Mitigations

• When evaluating any franchise, a business advisor can help you assess the long-term market demand for its products or services.
• Your attorney should be consulted to understand your obligations if the business's popularity declines.
• Reviewing a franchisor's plans for innovation and adaptation with a financial advisor is a prudent step.

Explanation

This risk was not identified in the FDD package. The executive team disclosed in Item 2 appears to have substantial experience in the restaurant and franchising industries. Inexperienced management can be a significant risk because they may lack the skills to manage a franchise system, provide effective support, or make sound strategic decisions for the brand. This can negatively impact franchisee profitability and the long-term health of the system.

Potential Mitigations

• A business advisor can help you vet the background and relevant experience of the franchisor's key management team.
• You should speak with existing franchisees about the quality of support and the effectiveness of the leadership team.
• If management is new to franchising, your attorney might inquire if they have engaged experienced franchise consultants to guide them.

Explanation

This risk was not identified in the FDD package, as the parent company, Dine Brands Global, Inc., is disclosed and its financial statements are provided. Failure to disclose a parent entity can hide significant risks, as the parent's financial health and operational decisions can directly impact the franchisor's ability to support you. It is a legal requirement to disclose such entities and provide their financials if they guarantee the franchisor's obligations.

Potential Mitigations

• Your attorney can help verify a franchisor's corporate structure if you suspect an undisclosed parent company.
• If a parent company's financials are provided, having your accountant review them is a critical due diligence step.
• Always ensure any guarantees from a parent company are in writing and reviewed by your legal counsel.

Explanation

This risk was not identified in the FDD package. The document notes several predecessor entities but does not indicate any attempt to hide or downplay their history. A franchisor's failure to adequately disclose the history of predecessor entities could conceal past problems with the franchise system, such as high failure rates or significant litigation. Understanding the full lineage of the brand is important for assessing its stability and the experience of its operators.

Potential Mitigations

• Your attorney should carefully review the predecessor information in Items 1, 3, and 4 of the FDD.
• It is wise to ask long-term franchisees about their experiences under any previous ownership or management.
• A business advisor can help you conduct independent research on the track record of any predecessor companies.