Explanation

The franchise system is experiencing steady growth, expanding from 8 to 20 franchised units over the last three years. While not explosive, this growth occurs while the parent company is reporting net losses. This combination could potentially strain the franchisor's financial and personnel resources, possibly affecting the quality and availability of support for new and existing franchisees as the system scales. Careful monitoring of support levels would be prudent.

Potential Mitigations

• Speaking with franchisees who opened at different stages of the system's growth can provide insight into how support levels have evolved.
• Your business advisor can help you question the franchisor about their specific plans to scale their support infrastructure to match unit growth.
• An accountant should review the franchisor's financials to assess whether they have allocated sufficient capital to support their expansion plans.

Explanation

This risk was not identified in the FDD package. The business operates in the coffee shop industry, which is a well-established and mainstream market, not typically considered a fad. The business model is based on a product with sustained, long-term consumer demand. While specific branding may appeal to certain trends, the core offering is not dependent on a fleeting novelty, reducing the risk of the business becoming obsolete once a trend passes.

Potential Mitigations

• Your business advisor can help you research the long-term stability and trends of the retail coffee market in your specific area.
• It is wise to assess any business opportunity's resilience to economic downturns and changing consumer tastes with a financial advisor.
• Consulting with your attorney about the franchise term ensures you understand the long-term commitment required, regardless of market shifts.

Explanation

This risk was not identified in the FDD package. The parent company, BRC Inc., is a publicly traded entity on the New York Stock Exchange. While it was formed through a transaction with a Special Purpose Acquisition Company (SPAC), it is not described as being controlled by a private equity firm. The risks associated with this franchise are more typical of a public company, such as focus on quarterly performance, rather than a private equity fund's specific investment horizon.

Potential Mitigations

• Your financial advisor can explain the differences in risk profiles between a publicly-traded franchisor and one owned by a private equity firm.
• It is always prudent for an attorney to review any clauses in the Franchise Agreement that permit the sale or assignment of the franchise system.
• A business advisor can help you research the ownership structure and any major shareholders of a publicly-traded parent company.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD clearly discloses the parent company, BRC Inc., and its status as a publicly traded entity. Furthermore, the FDD includes the parent company's audited financial statements in Item 21 and a performance guarantee in the exhibits. The corporate structure and the relationship between the franchisor and its parent appear to be transparently disclosed.

Potential Mitigations

• Your attorney should always confirm that the FDD properly discloses all parent companies, affiliates, and predecessors as required by law.
• When a parent company is involved, an accountant should verify that its financial statements are included if required, especially if it guarantees performance.
• Understanding the legal and financial relationship between a franchisor and its parent is a key part of due diligence a franchise attorney can assist with.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD states, "We have no predecessors." The company's history is traced through its formation and subsequent business combination that resulted in its current public company structure. There is no indication that the franchisor acquired the system from a prior, separate entity whose history might be relevant or obscured.

Potential Mitigations

• A franchise attorney should always review Item 1 carefully to identify any disclosed predecessors.
• If a predecessor is disclosed, it is important to have your attorney and accountant review their litigation, bankruptcy, and outlet history in Items 3, 4, and 20.
• Speaking with long-term franchisees can provide insight into the history of the system under any previous ownership, which a business advisor can facilitate.