Explanation

This risk was not identified in the FDD package. The franchised system is small and has not experienced rapid growth. However, rapid growth can be a concern because it may strain a franchisor's ability to provide adequate site selection guidance, training, and ongoing operational support to all franchisees, potentially diluting brand quality and franchisee support.

Potential Mitigations

• A business advisor can help you assess if the franchisor's current support infrastructure, detailed in Item 11, is adequate for its current size.
• Discuss the franchisor’s controlled growth strategy and support systems with your attorney.
• In speaking with current franchisees, it is useful to ask about the quality and timeliness of the support they currently receive.

Explanation

Benihana is a well-established brand, not a new or unproven system. This risk is typically associated with emerging franchises that may lack a track record, brand recognition, or refined operational systems. A new system presents higher risks of business model failure, insufficient support, and franchisor instability, making extensive due diligence on the concept's long-term viability and management's experience essential.

Potential Mitigations

• Even with an established brand, having an accountant review the franchisor's financials in Item 21 is crucial for understanding its current health.
• It is still advisable to contact a range of franchisees with your business advisor to confirm that the established systems are performing well for them.
• Your attorney can help you understand how the brand's long history affects the terms offered in the current franchise agreement.

Explanation

Benihana is a long-established restaurant concept and is not considered a fad. A fad business is one tied to a fleeting trend, posing a risk of declining consumer interest over time. Even if a business is well-established, it is still important to assess its modern relevancy and ability to adapt to changing consumer tastes, a process that can be evaluated by reviewing the franchisor's marketing and R&D efforts described in Item 11.

Potential Mitigations

• A business advisor can help you research the current restaurant market to assess the long-term demand for teppanyaki-style dining.
• Reviewing the franchisor's marketing materials and menu evolution provides insight into how they are keeping the brand current.
• Discuss with existing franchisees how they perceive the brand's relevance and competitiveness in their local markets.

Explanation

This risk was not identified in the FDD package. The executive team detailed in Item 2 appears to have significant experience in the restaurant and hospitality industry. Inexperienced management is a risk because it can lead to poor strategic decisions, underdeveloped operational systems, and inadequate franchisee support. Assessing the backgrounds of key executives is a crucial step in evaluating a franchise opportunity.

Potential Mitigations

• It is still prudent to have your business advisor review the biographies in Item 2 to confirm the management team's experience is relevant to your needs.
• When speaking with current franchisees, asking about their perception of the management team's competence and support is a valuable due diligence step.
• An attorney can help you understand how management's franchising experience, or lack thereof, might influence contract negotiations.

Explanation

Benihana National Corp. is a subsidiary of a publicly-traded parent, The ONE Group Hospitality, Inc., which is not private equity owned. This risk is associated with private equity ownership, which can sometimes lead to decisions prioritizing short-term investor returns over the long-term health of the franchise system. This may manifest as reduced franchisee support, increased fees, or a quick sale of the franchise system.

Potential Mitigations

• When evaluating any franchise, your attorney should always review Item 1 to understand the complete ownership structure, including any parent companies.
• It is beneficial to research the ownership's history and track record with other brands, which a business advisor can assist with.
• Franchisees should have their attorney review any clauses in the Franchise Agreement that permit the sale or assignment of the system.

Explanation

BNC is a subsidiary of The ONE Group Hospitality, Inc., which is disclosed in Item 1. The FDD properly includes the audited financial statements of The ONE Group in Exhibit E and a formal Guarantee of Performance in Exhibit H. This structure provides transparency and a financially stronger backstop for the franchisee, which is a positive factor. This risk typically arises when a franchisor fails to disclose a parent or withholds necessary financials.

Potential Mitigations

• It's crucial for your accountant to thoroughly review the parent company's financials to assess the overall health of the entity guaranteeing the franchise.
• Your attorney should carefully examine the language of the Guarantee of Performance to understand its scope and enforceability.
• A business advisor can help you understand the relationship between the parent and the franchisor subsidiary and how it might impact operations.

Explanation

The franchisor identifies Benihana of Tokyo, Inc. (BOT) as a predecessor from which it acquired assets and rights in 1995. Item 3 discloses a significant history of litigation between the franchisor and this predecessor, which appears to have been resolved. While this does not indicate undisclosed history, the complex past relationship could have lingering effects on the brand or operations. It is important to understand this history when evaluating the franchise.

Potential Mitigations

• A franchise attorney should be consulted to review the disclosures in Items 1 and 3 to understand the franchisor's history with its predecessor.
• It is wise to ask long-tenured franchisees about their experience and any impacts from the relationship with the predecessor.
• Your business advisor can help you research public information about the predecessor to gain additional context on the brand's history.

Explanation

Item 3 discloses a history of significant litigation between the franchisor and its predecessor, Benihana of Tokyo, Inc., over trademark and operational rights. While these cases appear to have been concluded in the franchisor's favor, the history itself is notable. The FDD does not disclose a pattern of recent litigation initiated by franchisees alleging fraud or by the franchisor against its franchisees, which is a positive sign.

Potential Mitigations

• A franchise attorney should review the litigation history in Item 3 to understand its nature and potential implications.
• Inquiring with long-term franchisees about the historical litigation and its impact on the system can provide valuable context.
• A business advisor can help you research the parties involved to get a fuller picture of the historical disputes.