Explanation

The data presented in Item 20 of the FDD does not indicate an unusually high rate of franchisee turnover through terminations, non-renewals, or other cessations of business. High turnover is a critical red flag in franchising, as it can signal systemic problems such as a lack of franchisee profitability, insufficient franchisor support, or an unviable business model. Careful analysis of these tables is always recommended.

Potential Mitigations

• When evaluating any franchise, your accountant should help you calculate and analyze the annual turnover rates from Item 20 data.
• It is a crucial due diligence step to contact former franchisees listed in the FDD to understand their reasons for leaving the system; your attorney can help frame questions.
• A business advisor can help compare the franchise's turnover rates against available industry benchmarks for context.

Explanation

Item 20 data shows consistent and strong system growth, with the number of franchised outlets increasing from 280 to 420 over the past three years. While growth is often positive, very rapid expansion can sometimes strain a franchisor's ability to provide adequate support to all units. The franchisor's financial statements in Item 21 appear to show sufficient profitability and cash flow to support this expansion, which mitigates this risk to a degree.

Potential Mitigations

• Discuss with the franchisor its specific plans for scaling support staff and infrastructure to match the rate of unit growth.
• Inquiring with both new and established franchisees about the current quality and responsiveness of franchisor support would be a valuable step.
• Your accountant can review the financial statements to assess whether investments in support infrastructure are keeping pace with growth.

Explanation

This risk was not identified. Global Orange Development, LLC (Global Orange) has been franchising since 1999 and demonstrates a long operational history. An unproven system presents higher risks, as it may lack refined operational procedures, established brand recognition, and a demonstrated track record of franchisee success. Diligence is especially important with newer franchise concepts.

Potential Mitigations

• For any new system, a business advisor can help you conduct extensive due diligence on the founders' and management's experience in both the industry and franchising.
• Speaking to the earliest franchisees is crucial to gauge the franchisor’s learning curve and support evolution; your attorney can guide these conversations.
• An accountant should carefully scrutinize the capitalization and financial stability of any new franchisor.

Explanation

This risk was not identified. The coffee shop industry is well-established with a long history of consumer demand, suggesting this is not a fad business. A fad-based business carries the risk that its popularity may be short-lived, potentially leaving you with a failing business and long-term contractual obligations after consumer interest wanes. Evaluating a concept's long-term market relevance is always a critical step.

Potential Mitigations

• Engaging a business advisor to research long-term market trends for any niche product or service is a prudent step.
• It is important to evaluate a franchisor’s stated plans for innovation, product development, and brand evolution to ensure long-term relevance.
• Your financial advisor can help you assess the business model's resilience to economic shifts and changing consumer tastes.

Explanation

The management team disclosed in Item 2 includes founders with experience dating back to 1998. However, some key executives, such as the Chief Financial Officer and Chief Marketing Officer, joined in 2023, and others have been promoted into their roles more recently. While there is a core of experience, the relative newness of some members of the senior leadership team could present challenges in strategy and execution, though this is a common occurrence in growing companies.

Potential Mitigations

• A business advisor can help you research the specific background and track record of the newer members of the executive team.
• Asking current franchisees about their direct experiences with the leadership team's effectiveness and strategic direction is a vital due diligence step.
• Your attorney can help you inquire about the stability of the management team and the company's vision.

Explanation

This risk was not identified, as Item 1 does not indicate that the franchisor is owned by a private equity firm. When a PE firm owns a franchisor, there can be a risk that short-term financial goals are prioritized over the long-term health of the brand and its franchisees. This might manifest as increased fees, reduced support, or a quick sale of the system.

Potential Mitigations

• If a franchisor is PE-owned, a business advisor should help you research the firm's reputation and track record with other franchise brands.
• Speaking with franchisees who have been in the system before and after a PE acquisition can provide valuable insight.
• Your attorney should carefully review any rights the franchisor has to sell or assign the franchise system.

Explanation

This risk was not identified. Item 1 and Item 21 appear to properly disclose the franchisor's corporate structure and provide consolidated financial statements for the franchisor and its affiliates as required. Failing to disclose a parent company or provide its financial statements when required can obscure the true financial health and backing of the franchise system, hiding potential risks from prospective franchisees.

Potential Mitigations

• Your attorney should always verify the corporate structure if there is any ambiguity about a controlling parent entity.
• If a parent company provides essential services or guarantees, it is critical for your accountant to ensure its financial statements are provided and reviewed.
• A financial advisor can help assess the stability of the entire corporate family, not just the franchisor entity.

Explanation

This risk was not identified. Item 1 states that Global Orange has not had any predecessors in the last 10 years. When a franchisor has acquired a system from a predecessor, it's important to investigate the predecessor's history, including any litigation, bankruptcy, or high franchisee turnover. This helps to uncover any inherited problems or historical challenges that could still affect the system today.

Potential Mitigations

• Your attorney should carefully review any disclosures in Items 1, 3, and 4 related to a franchisor's predecessor.
• It is wise to conduct independent research on a predecessor's history if a brand was acquired from another company.
• Engaging with long-term franchisees who operated under the predecessor can provide invaluable historical context.

Explanation

This risk was not identified. Item 3 does not disclose a pattern of litigation initiated by franchisees alleging fraud, misrepresentation, or other systemic issues. A history of such lawsuits can be a major red flag, suggesting potential problems with the franchisor's sales practices or the viability of the business model. The single disclosed case was an enforcement action by the franchisor against a franchisee, which is not uncommon.

Potential Mitigations

• It is critical for your attorney to review all litigation details in Item 3, including the nature of claims, their status, and outcomes.
• Independent legal research on disclosed cases can sometimes provide more context than the FDD summary; your attorney can assist with this.
• A pattern of franchisee-initiated lawsuits alleging fraud should be considered a significant warning sign.