Explanation

This specific risk was not identified in the FDD package. While the system is growing, the rate does not appear to be so rapid as to risk outstriacing the franchisor's support capabilities. It is generally important to assess whether a franchisor's support infrastructure is keeping pace with its unit growth to ensure new franchisees receive adequate help.

Potential Mitigations

• Engaging a business advisor to question the franchisor about their plans for scaling support services in line with future growth is a prudent step.
• During due diligence calls, you should ask existing franchisees about the quality and responsiveness of the support they currently receive.
• An accountant's review of the franchisor's financials can help determine if they are investing in infrastructure to support the system.

Explanation

This risk is not present. The franchisor, Muginoho International, Inc. (Muginoho), has been franchising since 2004 and has an established system with multiple locations. For new franchise systems, a prospective franchisee would face higher risks related to unproven business models, a lack of brand recognition, and undeveloped support structures.

Potential Mitigations

• When evaluating any franchise, it is wise to have a business advisor help you assess the franchisor's history and the maturity of their systems.
• Your attorney should always review the franchisor's corporate history and any predecessor information disclosed in Item 1.
• An accountant can analyze financial statements to determine if a franchisor relies more on initial fees than ongoing royalties, a potential sign of an unstable new system.

Explanation

This risk does not appear to be present. The core product, cream puffs, is a classic dessert rather than a temporary trend. The brand has an international presence and has been operating for many years. Generally, investing in a fad business carries the risk of a sharp decline in consumer interest after an initial peak, potentially leaving you with a failing business.

Potential Mitigations

• It is always a good practice to have a business advisor help you research the long-term market demand and competitive landscape for the product category.
• You should assess the franchisor's plans for product innovation and menu evolution to ensure they can adapt to changing consumer tastes.
• A financial advisor can help you evaluate the business model's resilience to economic shifts and trends.

Explanation

This risk was not identified. The key executives listed in Item 2 appear to have relevant experience in the food service industry, with the parent company, and in franchising specifically. In any franchise investment, it is crucial that the management team has the experience necessary to provide effective leadership, training, and support to franchisees.

Potential Mitigations

• A thorough review of the backgrounds of the management team described in Item 2 with your business advisor is always recommended.
• During due diligence calls, it's beneficial to ask current franchisees about their confidence in the current leadership team.
• Your attorney can help you research the professional history of key executives for a more complete picture.

Explanation

This risk does not appear to be present. Item 1 indicates the franchisor is a wholly-owned subsidiary of Nagatanien Holdings Co., Ltd., a Japanese food company, not a private equity firm. When considering a franchise owned by a private equity firm, there may be concerns about a focus on short-term returns over the long-term health of the system.

Potential Mitigations

• You should always research the ownership structure of a franchisor, which your attorney can help you understand from Item 1.
• A business advisor can help you investigate the track record of any parent company, including its history with other brands it owns.
• It's important to ask current franchisees if they have noticed any changes in support or focus since any ownership change.

Explanation

This risk was not identified. The FDD clearly discloses the parent and affiliate companies in Item 1. The franchisor's financial statements in Exhibit D are also explicitly identified as being for a wholly-owned subsidiary. In general, it is important that a franchisor properly discloses its parent entities, as their financial health and influence can be material to your investment.

Potential Mitigations

• Your attorney should always verify that the ownership structure and all relevant parent and affiliate companies are clearly disclosed in Item 1.
• An accountant can help determine if parent company financial statements should have been included based on FTC rules, especially if the franchisor is thinly capitalized.
• Understanding the role and obligations of any parent company, including any guarantees they provide, is a key part of due diligence.

Explanation

This risk is not present, as the franchisor states in Item 1 that it has no predecessors. When a franchisor does have a predecessor, it is important to scrutinize that entity's history for issues like litigation, bankruptcy, or high franchisee turnover, as these could indicate unresolved systemic problems that have been passed on to the current franchisor.

Potential Mitigations

• Your attorney should always confirm the franchisor's statement regarding predecessors in Item 1.
• A business advisor can help you research a company's history to see if it has acquired assets from or is functionally a continuation of a prior franchise system.
• When a predecessor exists, speaking with long-term franchisees about their experience under the prior ownership is crucial.

Explanation

This risk was not identified. Item 3 states that there is no litigation required to be disclosed. A pattern of litigation, especially lawsuits from franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems with a franchisor's practices or the viability of its business model.

Potential Mitigations

• Your attorney should always carefully review Item 3 and can also conduct independent searches for litigation involving the franchisor.
• It's beneficial to ask current and former franchisees about any disputes they may have had with the franchisor, even if they did not result in litigation.
• A business advisor can help you assess whether the nature of any disclosed litigation points to broader problems within the franchise system.