Explanation

This risk was not identified in the FDD package. Rapid, uncontrolled growth can stretch a franchisor's resources, potentially leading to a decline in the quality of support, training, and site selection assistance provided to franchisees. This can be especially problematic for newer systems.

Potential Mitigations

• An accountant can analyze the franchisor's financial statements to determine if they are investing sufficiently in support infrastructure to match growth.
• Engaging a business advisor to question the franchisor about their specific plans for scaling support systems is a prudent step.
• Your attorney should review the franchisor's contractual support obligations to ensure they are specific and enforceable.

Explanation

This risk was not identified in the FDD package. A business concept tied to a short-term trend or fad can face a sharp decline in consumer interest, jeopardizing its long-term viability. Even if the trend fades, your contractual obligations to the franchisor, such as paying fees, will likely continue for the full term of the agreement.

Potential Mitigations

• A business advisor can help you independently research the long-term market demand and sustainability for the products or services offered.
• Understanding the franchisor's plans for innovation, product development, and adaptation beyond the current trend is crucial.
• A financial advisor can help assess the business model's resilience to shifts in consumer tastes and economic downturns.

Explanation

This risk was not identified in the FDD package. When a franchisor is owned by a private equity firm, there can be a focus on short-term profitability and a quick exit strategy. This may lead to decisions that benefit the investors over the long-term health of the franchisees, such as cutting support services or increasing fees.

Potential Mitigations

• A business advisor can help you research the private equity firm's reputation and track record with other franchise brands.
• Speaking with franchisees who have been in the system before and after the acquisition can provide valuable insight.
• Your attorney should review the assignment clause in the franchise agreement to understand what happens if the franchisor is sold.

Explanation

This risk was not identified in the FDD package. Failing to disclose a parent company or provide its financial statements when required can hide critical information about the true financial health, stability, and control of the franchise system. This omission can prevent you from properly assessing the risks associated with the franchisor's ultimate ownership and financial backing.

Potential Mitigations

• An attorney can help investigate the franchisor's corporate structure if you suspect an undisclosed parent entity.
• If a parent company guarantee is mentioned, an accountant should confirm that the parent's financial statements are included and properly audited.
• A business advisor can help assess the potential impact of a controlling parent company on the franchise operations.

Explanation

This risk was not identified in the FDD package. A franchisor's failure to properly disclose its predecessor's history can conceal important information about the system's past. This might include prior bankruptcies, litigation, or high franchisee failure rates that could indicate unresolved systemic problems you would otherwise be unaware of before investing.

Potential Mitigations

• Your attorney should carefully scrutinize Item 1 of the FDD for any mention of predecessors and related disclosures in other Items.
• A business advisor can assist in conducting independent research, such as news and internet searches, on any identified predecessor.
• It's valuable to ask long-term franchisees about their experiences under any previous ownership.

Explanation

No litigation is required to be disclosed in Item 3. A pattern of lawsuits filed by franchisees against the franchisor alleging fraud, misrepresentation, or breach of contract can be a major red flag. It may indicate systemic problems with the franchisor's sales process, operational support, or overall business practices.

Potential Mitigations

• A franchise attorney can conduct independent searches for litigation that may not have been required to be disclosed.
• A business advisor can guide you in asking current and former franchisees about any disputes they have had with the franchisor.
• An accountant's review of the franchisor's financials might reveal legal expenses or settlement costs.