Explanation

This risk was not identified in the FDD Package. Rapid system growth can strain a franchisor's ability to provide adequate support, training, and quality control to all franchisees. If a system expands faster than its support infrastructure, new franchisees may find the promised assistance is diluted or unavailable, which can negatively impact their launch and ongoing operations. Therefore, it is crucial to assess if the franchisor's growth is managed sustainably.

Potential Mitigations

• Asking the franchisor about their plans for scaling support infrastructure to match unit growth is a worthwhile discussion to have with your business advisor.
• It is wise to interview a range of existing franchisees, both new and established, to gauge the current quality and responsiveness of franchisor support.
• An accountant's review of the franchisor's financial statements can help assess if they appear to have the capital resources to support continued growth.

Explanation

This risk was not identified in the FDD Package. A business centered around a fleeting trend or fad presents a significant long-term risk. Once public interest wanes, sales can plummet, potentially leading to business failure. A franchisee remains bound by the long-term franchise agreement and lease obligations even after the fad has passed. Evaluating a concept's staying power and its ability to adapt beyond current trends is a critical piece of due diligence.

Potential Mitigations

• Assessing the long-term market demand for the core product or service with a business advisor is a key step.
• It is wise to evaluate the franchisor's stated plans for innovation, research, and development to gauge their focus on long-term relevance.
• Analyzing the business model's resilience to economic shifts and changing consumer tastes with a financial advisor is recommended.

Explanation

This risk was not identified in the FDD Package. Item 2 of the FDD lists the key executives of the franchisor and its parent companies. The individuals listed generally have extensive experience in the restaurant and franchising industries, many with long tenures at Kahala Brands or MTY Food Group, Inc. A lack of relevant experience in a franchisor's management team can be a significant red flag, but that does not appear to be the case here.

Potential Mitigations

• A business advisor can help you review the backgrounds of the key management personnel listed in Item 2.
• It is good practice to ask current franchisees about their direct experiences with the management team's competence and support.
• Confirming that the management team has specific experience relevant to your restaurant's market segment is a prudent step.

Explanation

The franchisor, BFAH, is a subsidiary of MTY Franchising USA, Inc., which in turn is a subsidiary of MTY Food Group, Inc. The FDD properly discloses this structure and provides the audited financial statements for the parent guarantor, MTY Franchising USA, Inc., as required. A Performance Guaranty from MTY Franchising USA, Inc. is also included as Exhibit W. There is no indication of a failure to disclose a required parent company or its financials.

Potential Mitigations

• Your accountant should review the provided parent financial statements to assess the guarantor's ability to back the franchisor's obligations.
• It is prudent to have your attorney review the terms of the Performance Guaranty to understand the scope of the guarantee.
• Confirming with your attorney that the correct entity's financials have been provided is an important due diligence step.

Explanation

This risk was not identified in the FDD Package. Item 1 discloses a detailed history of predecessors and acquisitions involving entities like Triune, LLC, Fresh Enterprises, and MTY. The litigation and administrative action history of these related entities are disclosed in Item 3. This transparency, while revealing other risks related to litigation, fulfills the disclosure requirement for predecessor history. You are being given access to the historical context of the system.

Potential Mitigations

• An attorney should carefully review the information on predecessors in Items 1, 3, and 4 to form a complete picture of the system's history.
• It is wise to ask long-term franchisees about their experiences under any previous ownership structures.
• A business advisor can help you research the public records or news archives concerning the franchisor's predecessors for additional context.