Explanation

This risk was not identified in the FDD package. As a new franchise system, there is no history of franchisee turnover. Tracking this data from Item 20 in future FDDs is important because high turnover (terminations, non-renewals, or closures) can signal systemic problems, such as a lack of profitability or franchisee dissatisfaction. Consistent turnover may indicate underlying issues with the business model or franchisor support, which could affect your long-term success.

Potential Mitigations

• In future years, a careful analysis of the Item 20 tables with your accountant is essential to calculate the true rate of franchisee exits.
• Should turnover become a factor later, consulting with your attorney to understand your rights if the system shows signs of failure would be prudent.
• A business advisor can help you assess how system-wide trends, like franchisee turnover, might impact your specific location's viability.

Explanation

This specific risk was not identified. The franchise is for a specialty coffee shop, which is a well-established industry with enduring consumer demand, rather than a business based on a short-lived trend. While the focus on Yemeni coffee is a niche, it operates within the broader, stable coffee market. The long-term success will likely depend on operational execution and management rather than the sustainability of a fad.

Potential Mitigations

• A discussion with your business advisor can help you analyze the long-term market potential for specialty and niche coffee concepts in your area.
• It would be beneficial to have your accountant help you model different scenarios for consumer demand to assess financial resilience.
• Your attorney should review the Franchise Agreement for flexibility in adapting the menu or concept if local tastes change over time.

Explanation

This risk was not identified in the FDD package. Item 1 indicates the franchisor is a privately held limited liability company and does not mention any ownership by a private equity firm. The risks typically associated with private equity ownership, such as a focus on short-term returns over long-term brand health or potential rapid resale of the system, do not appear to be present based on the ownership structure disclosed.

Potential Mitigations

• Your attorney can help you verify the ownership structure disclosed in Item 1 through public record searches.
• It is still prudent to have your attorney review the assignment clause in the Franchise Agreement to understand who the franchisor can sell the system to.
• A business advisor can explain the different risks associated with various types of franchisor ownership structures.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD states that Arwa does not have a parent entity. The franchisor discloses several affiliate companies that provide services or own intellectual property, but no controlling parent company is mentioned. Therefore, the risk of a parent company's financial instability or influence affecting the franchise is not applicable based on the document's disclosures.

Potential Mitigations

• Your accountant should review the financial statements of the franchisor itself, as there is no parent company to provide a financial backstop.
• A consultation with your attorney is useful to understand the roles and relationships of the various affiliate companies disclosed in Item 1.
• A business advisor can help you analyze the potential risks associated with a stand-alone franchisor entity without parent support.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD clearly states that the franchisor does not have a predecessor entity. Therefore, there is no risk associated with an undisclosed or problematic history from a previous company that operated the brand. You are evaluating a new company and system without a legacy of past issues from a predecessor.

Potential Mitigations

• Your attorney can confirm the newness of the company by reviewing its formation date in Item 1.
• While there is no predecessor, a business advisor can help you research the business history of the individual founders listed in Item 2.
• An accountant should focus their analysis on the current franchisor's financials, as there are no predecessor financials to consider.

Explanation

This risk was not identified in the FDD package. Item 3 states that there is no litigation that requires disclosure. For a new franchisor, the absence of litigation is expected. However, it is a critical area to monitor in future FDDs. A pattern of lawsuits filed by franchisees alleging fraud or by the franchisor against franchisees for contract breaches can be a significant red flag about the health and integrity of a franchise system.

Potential Mitigations

• Your attorney can perform an independent public records search to confirm the absence of litigation, although this is generally not necessary for a new system.
• When reviewing future FDDs, it will be crucial for your attorney to analyze any disclosed litigation for patterns or serious allegations.
• Speaking with current franchisees during due diligence is a good way to learn about any disputes that have not yet resulted in formal litigation.