Explanation

This risk was not identified in the FDD package. The franchise system is very new, with only one franchised outlet opened in the last three years and no terminations, non-renewals, or other cessations reported. While this means there is no history of high turnover, the lack of data also means the system's stability and franchisee satisfaction are unproven. It is crucial to monitor turnover rates as the system grows, as high rates can indicate systemic problems.

Potential Mitigations

• As the system grows, an annual review of Item 20 data with your accountant is essential to track franchisee turnover trends.
• Maintaining open communication with other franchisees can provide early insight into system-wide satisfaction or problems.
• A business advisor can help you compare future turnover rates against industry benchmarks to assess system health.

Explanation

This risk was not identified in the FDD package. Item 20 data shows the system is extremely small, with only one franchised and two company-owned outlets at the end of 2024. Therefore, the risk is not rapid growth but rather the opposite: the system is new and unproven. The concern is not about strained resources from expansion but whether the franchisor can successfully grow the system at all.

Potential Mitigations

• With your business advisor, you should evaluate the franchisor's growth strategy and its capacity to support new units.
• It is wise to have your accountant review the franchisor's financial statements to assess its ability to fund future growth.
• Engaging with the first few franchisees will be crucial to understand the realities of operating within this new system.

Explanation

This risk was not identified in the FDD package. The business model, offering Mediterranean Halal food, serves a well-established and growing market segment rather than being tied to a short-term trend. This suggests a degree of market stability. However, the success of any food concept depends on sustained consumer preference and operational excellence. The long-term viability of this specific brand within that market remains to be proven due to its newness.

Potential Mitigations

• A business advisor can help you conduct local market research to confirm sustained demand for this type of cuisine in your area.
• You should evaluate the franchisor's plans for menu innovation and adaptation to stay competitive over the long term.
• Speaking with your financial advisor about the resilience of fast-casual dining to economic shifts is a prudent step.

Explanation

This risk was not identified in the FDD package, as Item 1 does not indicate that the franchisor is owned by a private equity firm. Franchise systems owned by such firms can sometimes prioritize short-term investor returns over the long-term health of franchisees. This can manifest as increased fees, reduced support, or a quick resale of the entire system.

Potential Mitigations

• It is a good practice to ask your attorney to verify the ownership structure of the franchisor entity.
• A business advisor can help you research the reputation and track record of any parent company or major investor.
• Understanding the franchisor's long-term vision for the brand, not just short-term growth, is a key piece of due diligence.

Explanation

This risk was not identified in the FDD package. The franchisor, Baba's Halal, discloses its affiliates in Item 1 but does not appear to have a parent company whose financials would be required for a full risk assessment. In some cases, a franchisor might be a thinly capitalized subsidiary, and the financial health of a non-disclosed parent company could be a crucial, missing piece of information for a prospective franchisee.

Potential Mitigations

• An experienced franchise attorney can help you investigate the franchisor's corporate structure to ensure there are no undisclosed parent entities.
• You should have your accountant review the provided financial statements for any signs that the franchisor relies on undisclosed entities for funding.
• Always ask the franchisor to clarify its complete ownership structure and any relationships with parent or holding companies.

Explanation

This risk was not identified in the FDD package. Item 1 states that Baba's Halal does not have any predecessors. A predecessor is a company from which the franchisor acquired a major portion of its assets. When a predecessor exists, it is important to review their history for issues like litigation, bankruptcy, or high franchisee turnover, as these could indicate underlying problems that may have been inherited by the current franchisor.

Potential Mitigations

• Your attorney should always confirm the accuracy of the predecessor disclosure in Item 1.
• Even without a formal predecessor, it can be useful to have a business advisor research the business history of the franchisor's founders.
• Asking existing franchisees about the history of the brand and its management provides valuable context.

Explanation

This risk was not identified in the FDD package. Item 3 states that no litigation is required to be disclosed. A pattern of litigation, particularly franchisee-initiated lawsuits alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may signal systemic problems with the franchisor's business practices, support systems, or relationship with its franchisees. The absence of such litigation is a positive indicator, especially for a new system.

Potential Mitigations

• It is wise for your attorney to conduct an independent public records search to confirm the absence of litigation.
• Discussing any past or pending legal issues with current franchisees can provide insights not available in the FDD.
• Understanding the typical litigation landscape for similar franchise systems can be helpful context provided by a franchise attorney.