Explanation

This risk was not identified in the FDD Package. A fad business is one tied to a fleeting trend rather than sustained consumer demand. Investing in a fad carries the risk of business failure once public interest wanes, even if your contractual obligations to the franchisor continue. Evaluating the long-term market relevance of the product or service is a critical due diligence step.

Potential Mitigations

• Assess the long-term market demand for the product or service independently with your business advisor.
• Evaluate the franchisor's plans for innovation, adaptation, and staying relevant by reviewing Item 11 disclosures on research and development.
• Consider the sustainability of the business model beyond current trends with your financial advisor.

Explanation

This risk was not identified in the FDD Package. The management team listed in Item 2 appears to have relevant industry experience dating back to 2013. However, it's important to assess if their experience translates to effectively managing a franchise system and supporting franchisees. Inexperienced franchisors can lead to underdeveloped systems, poor strategic decisions, and inadequate support for franchisees, which is a significant risk for your investment.

Potential Mitigations

• Thoroughly vet the management team's background and relevant experience in both the specific industry and in managing a franchise system with your business advisor.
• Speak extensively with existing franchisees about the quality of support, system maturity, and management's responsiveness.
• Assess if the franchisor has engaged experienced franchise consultants or staff if they are new to franchising.

Explanation

This risk was not identified in the FDD Package, as Item 1 does not indicate ownership by a private equity firm. When a franchisor is PE-owned, there is a risk that decisions may prioritize short-term investor returns over the long-term health of franchisees. This can manifest as increased fees, reduced support, or pressure to use affiliated vendors.

Potential Mitigations

• Research the private equity firm's track record with other franchise systems they own or have owned with your business advisor.
• Talk to franchisees about any changes in support, fees, or system direction since a PE acquisition.
• Your attorney should assess any restrictions on the franchisor's right to assign the agreement if the system is sold.

Explanation

This risk was not identified in the FDD Package. The franchisor, BB Franchise, LLC, has an affiliate, The Baked Bear, LLC, which is clearly disclosed in Item 1. The financials for the franchisor are provided. A risk can arise if a parent company's financial status is necessary for a full risk assessment (e.g., if it guarantees obligations) but is not disclosed as required by law.

Potential Mitigations

• Your attorney should verify the corporate structure if there's any suspicion of an undisclosed controlling parent entity.
• If a parent provides guarantees or is a key supplier, your attorney should ensure parent financials are present if required by law.
• Your accountant should review any parent financials provided to ensure they meet standard accounting and audit requirements.

Explanation

This risk was not identified in the FDD Package. The franchisor discloses it has no predecessors. A risk can occur if a franchisor acquired a system from a predecessor but fails to disclose negative history associated with that predecessor, such as litigation or high failure rates. This can obscure the true historical challenges of the brand and operating system.

Potential Mitigations

• Your attorney should carefully review any predecessor information disclosed in Items 1, 3, and 4 of the FDD.
• If the system was acquired, researching the predecessor's track record independently with a business advisor is a prudent step.
• Asking long-term franchisees about their experience under any predecessors can provide 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 lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, is a significant red flag. It can indicate systemic problems with the franchisor's sales practices, disclosure integrity, or overall business model. A high volume of franchisor-initiated lawsuits against franchisees can also suggest an overly aggressive or punitive operational approach.

Potential Mitigations

• Your attorney should always carefully review the details of any litigation disclosed in Item 3.
• Consider conducting independent legal research for additional context on any disclosed cases, with assistance from your attorney.
• Treat a pattern of fraud claims or an unusually high volume of franchisor-initiated litigation as a major red flag.