Explanation

The risk of high franchisee turnover was not identified, as Item 20 shows that no franchised outlets were operating as of the end of 2024. While this means there is no history of closures or terminations, it also signifies a lack of an operational track record for the franchise system. You will not have any existing or former franchisees to contact for due diligence, which makes assessing franchisee satisfaction and system viability more challenging.

Potential Mitigations

• Speaking with the owners and managers of the company-owned location mentioned in Item 19 can provide some operational insights; your business advisor can help formulate questions.
• Your attorney should advise on the implications of investing in a system with no franchisee operating history.
• Once franchisees begin operating, it will be critical to monitor future FDDs with your accountant to track turnover rates.

Explanation

This risk was not identified, as the franchise system is in its infancy with no franchisees and only one company-owned store. Generally, rapid growth can strain a franchisor's resources, potentially leading to inadequate franchisee support. While not currently an issue, monitoring the pace of future growth against the franchisor's financial and personnel capacity to provide support will be important.

Potential Mitigations

• Your business advisor can help you question the franchisor about its plans for scaling support infrastructure to match future franchise sales.
• An accountant should periodically review the franchisor's financial statements in future FDDs to assess if they have the resources to support growth.
• Discussing the franchisor’s long-term vision for system growth with your business advisor is a prudent step.

Explanation

This specific risk was not identified in the FDD, as Item 1 does not indicate that the franchisor is owned by a private equity firm. Generally, private equity ownership can introduce risks related to a focus on short-term returns over long-term brand health. This might manifest as increased fees, reduced support, or a quick sale of the franchise system.

Potential Mitigations

• Your attorney can help you verify the franchisor's ownership structure through public records.
• In any franchise investment, it's wise for your attorney to review the 'Assignment by Franchisor' clause to understand what happens if the system is sold.
• A business advisor can help research the reputation of any ownership group, should one be involved.

Explanation

This risk was not identified, as Item 1 does not disclose a parent company. The franchisor entity appears to be a standalone startup. In franchise systems where a thinly capitalized subsidiary is the franchisor, the parent company's financial health is material. Failure to provide parent financials, if they guarantee obligations or are a key supplier, can obscure the true financial backing of the system.

Potential Mitigations

• Your attorney can confirm the franchisor's corporate structure and ascertain if there are any undisclosed parent or controlling entities.
• If a parent company were involved, an accountant should review their financials for a complete picture of the system's stability.
• A review of any parent guarantees with legal counsel would be essential to understand the extent of the backing provided.

Explanation

This risk was not identified, as the FDD in Item 1 indicates Blank Mason Development has no predecessors. In situations where a franchise system was acquired from a prior company, it is important to review the predecessor's history for issues like litigation, bankruptcy, or high franchisee turnover, as these could indicate underlying problems that may have been inherited by the current franchisor.

Potential Mitigations

• Verifying the franchisor's history through independent research can be a useful step for your business advisor.
• An attorney can help you understand the implications if a predecessor was involved.
• If a system has a predecessor, speaking with long-term franchisees about their experience is a critical due diligence step.

Explanation

This risk was not identified, as Item 3 states that no material litigation is required to be disclosed. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, is a significant red flag that can indicate systemic problems with a franchisor's sales practices or operations. Similarly, a high volume of lawsuits initiated by the franchisor against franchisees can suggest an overly aggressive or litigious culture.

Potential Mitigations

• Your attorney can conduct public records searches to see if any litigation exists that was not required to be disclosed in the FDD.
• It's a good practice to ask current franchisees about their experiences with disputes within the system.
• Understanding the dispute resolution clauses in the Franchise Agreement with your attorney is important regardless of litigation history.