Explanation

This risk was not identified in the FDD package. Analysis of Item 20 data for the last three years indicates a relatively low franchisee turnover rate. A high turnover rate, where many franchisees are terminating their agreements, failing to renew, or otherwise ceasing operations, can be a major red flag. It often suggests systemic problems, such as unprofitability, inadequate support, or franchisee dissatisfaction. You should still investigate the reasons for the turnover that has occurred.

Potential Mitigations

• When speaking with current and former franchisees, it is wise to ask about their satisfaction with the business model and their perception of system-wide morale.
• A business advisor can help you analyze the Item 20 data in detail and compare it to any available industry benchmarks.
• Your accountant can help you model different scenarios to understand the financial conditions that might lead a franchisee to leave the system.

Explanation

This risk was not identified. Auntie Anne's is a mature brand with a large number of existing units, and the growth rate disclosed in Item 20 does not appear to be excessively rapid. Rapid growth can sometimes strain a franchisor's ability to provide adequate support, training, and quality control to its new and existing franchisees. This can diminish the value of the support systems for which you pay ongoing royalties.

Potential Mitigations

• It is still prudent to ask existing franchisees about the quality and timeliness of the support they currently receive from the franchisor.
• A discussion with your business advisor can help assess if the franchisor's current support infrastructure, as described in Item 11, is robust.
• Your accountant can review the franchisor's financials to confirm it has the resources to sustain its current level of support and controlled growth.

Explanation

This risk was not identified. Auntie Anne's is a well-established brand that has been franchising for many years, as disclosed in Item 1. An unproven system presents higher risks because the business model may not be validated, brand recognition is low, and the franchisor may lack the experience to provide effective support. These factors can increase the likelihood of business failure for a franchisee.

Potential Mitigations

• Engaging a business advisor to research the brand's history and market position can provide valuable context.
• When speaking with long-term franchisees, inquire about the system's evolution and the franchisor's historical performance.
• Your attorney can review the history of the business as described in Item 1 to identify any potential concerns from its predecessor entities.

Explanation

This risk is not present. Auntie Anne's operates in the well-established food and snack industry and is not based on a recent or fleeting trend. Investing in a fad business is risky because consumer demand may disappear before you can achieve a return on your investment. This would leave you with a potentially failing business while you are still bound by the long-term franchise contract.

Potential Mitigations

• A business advisor can help you research the long-term stability and trends of the quick-service food market.
• Consider discussing the brand's adaptability and product innovation with current franchisees.
• Your financial advisor can help model the business's potential resilience to economic shifts and changing consumer tastes.

Explanation

This risk does not appear to be present. The management team listed in Item 2 has extensive experience in the restaurant and franchise industries, many with long tenures at the parent company, GoTo Foods, or its other brands. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, inadequate support systems, and a general lack of understanding of the franchisee-franchisor relationship, which could jeopardize your investment.

Potential Mitigations

• It is still a good practice to research the professional reputation of key executives with your business advisor.
• Asking current franchisees about their direct experiences and satisfaction with the management team can provide valuable insight.
• Your attorney can review the employment history in Item 2 for any potential red flags, such as high turnover in key positions.

Explanation

The FDD discloses the parent company, GoTo Foods LLC, and provides its audited financial statements as required. While the structure is complex, the franchisor has not failed to disclose its parent. Failure to disclose a parent company or its financials when required can obscure significant risks. It could hide financial instability or a complex corporate structure that might negatively affect the franchisor's ability to support its franchisees.

Potential Mitigations

• A franchise attorney should review the disclosed corporate structure to ensure all relevant parent and affiliate entities are identified.
• It is beneficial for your accountant to analyze the financial statements of both the guarantor and the ultimate parent to get a complete picture of financial health.
• Discussing the corporate structure and its potential impact on the franchise system with your business advisor is recommended.

Explanation

The FDD discloses that Auntie Anne's LLC is the predecessor to the current franchisor. It also discloses litigation involving affiliates that were part of the same parent company structure. The information appears to be presented as required. A failure to disclose a complete history, including past litigation, bankruptcies, or high franchisee turnover under a predecessor, could obscure recurring problems within the system's management or business model.

Potential Mitigations

• Your attorney should carefully review the disclosed history of the predecessor and its relationship to the current franchisor.
• Inquiring with long-term franchisees about their experiences under the predecessor entity can provide valuable historical context.
• A business advisor can help you research public records for any additional information on the predecessor's business history.