Explanation

This risk was not identified in the FDD Package. Rapid system growth can be a concern if a franchisor's support infrastructure, such as training staff and field support, does not keep pace with the number of new units being opened. This can lead to a dilution in the quality of support for all franchisees, potentially harming your business operations and profitability as the system expands.

Potential Mitigations

• A business advisor can help you analyze the franchisor's growth plans in relation to its current support staff and resources.
• It is prudent to ask current franchisees about their perception of the quality and timeliness of franchisor support.
• Your accountant can review the franchisor's financial statements to assess if they are reinvesting sufficiently in support infrastructure.

Explanation

This risk was not identified in the FDD Package. A fad business is one tied to a short-term trend, which can lead to a rapid decline in customer demand after an initial surge. It is important to assess whether a franchise concept has long-term market sustainability and is adaptable to changing consumer preferences. Investing in a fad business is risky because your long-term contractual obligations remain even if the trend disappears.

Potential Mitigations

• Engaging a business advisor to research the long-term market trends for the product or service is a crucial step.
• It's wise to evaluate the franchisor's history of innovation and plans for future product or service development.
• Seeking advice from your financial advisor on the resilience of the business model to economic shifts can provide valuable perspective.

Explanation

This risk was not identified in the FDD Package. Item 2 shows that the key executives, primarily through their long-standing roles at the parent company Pro Food Systems, have extensive experience in the food service and franchising industries. However, it is always important to verify that management's experience is directly relevant to the specific concept being franchised, as experience in one sector does not always guarantee success in another.

Potential Mitigations

• A business advisor can help you research the backgrounds of the key executives to verify their experience is relevant to this specific concept.
• When speaking with other franchisees, it is useful to ask about their perception of the management team's competence and support.
• Your attorney can help you formulate questions for the franchisor about how their past experience applies to this business.

Explanation

This risk was not identified in the FDD Package, as Item 1 indicates the franchisor is a subsidiary of Pro Food Systems, Inc., not a private equity firm. When a franchisor is owned by a private equity firm, there can be a risk that decisions are focused on short-term financial returns for investors, which may not align with the long-term health of the franchisees' businesses.

Potential Mitigations

• If a franchisor is owned by a private equity firm, a business advisor can help research the firm's reputation and track record with other franchise systems.
• It is wise to ask current franchisees about any changes in support or fees since a private equity acquisition.
• Your attorney should review the assignment clauses in the Franchise Agreement to understand your rights if the system is sold.

Explanation

This risk was not identified in the FDD Package. The franchisor does not disclose any predecessors. In cases where a franchisor has acquired the system from a predecessor, it is important to understand the predecessor's history, including any litigation, bankruptcy, or franchisee turnover. This information provides a more complete picture of the franchise system's historical challenges and performance.

Potential Mitigations

• If a predecessor is listed, a business advisor can help you research its history and reputation in the industry.
• Speaking with long-term franchisees who operated under the predecessor can provide valuable insights.
• Your attorney should carefully review all disclosures related to a predecessor in Items 1, 3, and 4 of the FDD.

Explanation

This risk was not identified in the FDD Package. Item 3 discloses no litigation. A pattern of litigation, particularly franchisee-initiated lawsuits alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may indicate systemic problems with the franchisor's sales practices, support obligations, or overall business model. Conversely, a high number of lawsuits initiated by the franchisor against franchisees might suggest an overly aggressive or punitive culture.

Potential Mitigations

• It is still prudent to conduct independent online searches for any litigation involving the franchisor or its principals that may not have been required for disclosure.
• Your attorney can help you understand the types of litigation that are most concerning in a franchise context.
• Always ask current and former franchisees about their experiences with disputes and the franchisor's conflict resolution approach.