Explanation

This risk was not identified in the FDD Package, as the data in Item 20 shows the system is shrinking, not growing rapidly. Rapid growth can strain a franchisor's ability to provide adequate support. While not a risk here, the opposite trend of system contraction presents its own set of significant challenges.

Potential Mitigations

• Your business advisor can help you interpret system growth or shrinkage trends and their implications for brand health and franchisee support.
• When analyzing Item 20, have your accountant look at multi-year trends to identify the pace and sustainability of system size changes.
• Consulting with a franchise attorney is important to understand how system size might affect your rights and the franchisor's obligations.

Explanation

This risk was not identified in the FDD Package. The franchisor began offering franchises in 2017 and, according to Item 20, has a substantial number of operational units. Therefore, it is not considered a new or unproven system. Mature systems can provide more stability and brand recognition, but may also have less room for growth.

Potential Mitigations

• When evaluating a franchise, your business advisor can help you assess the maturity of the system and its position in the industry lifecycle.
• An attorney should still review the franchisor's history in Item 1 and management experience in Item 2, regardless of system age.
• Engaging an accountant to review the financials of any system, new or old, is a critical step in due diligence.

Explanation

This risk was not identified in the FDD Package. Item 2 indicates that the key management personnel, including the founder, have been with the company for many years and have direct experience with this specific business concept since its inception in 2014. In franchising, having an experienced and stable management team is generally a positive factor for system support and strategic direction.

Potential Mitigations

• Your business advisor should still help you vet the backgrounds of the management team described in Item 2 to confirm their relevant industry and franchising experience.
• When speaking with franchisees, it's wise to ask about their direct experiences with the management team's competence and support.
• An attorney can help you understand the implications of any recent changes in key personnel, even if the team seems experienced.

Explanation

This risk was not identified in the FDD Package. According to Item 1 and Item 2, the franchisor appears to be founder-led and privately held, with no indication of ownership by a private equity firm. Private equity ownership can sometimes lead to a focus on short-term profits over the long-term health of the franchise system.

Potential Mitigations

• Your attorney can help you verify the ownership structure of the franchisor as disclosed in Item 1.
• A business advisor can help research the franchisor and its principals for any undisclosed affiliations with investment firms.
• It is always prudent to ask the franchisor directly about their long-term vision for the company, regardless of ownership structure.

Explanation

This risk was not identified in the FDD Package. Item 1 states the franchisor has no parent company. It does disclose an affiliate that owns the trademarks, and the audited financial statements in Item 21 are properly combined to reflect the financial position of both entities. This provides a clear picture of the overall enterprise.

Potential Mitigations

• Your attorney should always verify the corporate structure described in Item 1 and confirm that financials for all relevant entities are provided.
• If a parent company were involved, an accountant would need to review its financials to assess the true stability of the system.
• A business advisor can help you understand the relationships between a franchisor and its affiliates and the potential impact on your business.

Explanation

This risk was not identified in the FDD Package. Item 1 states the franchisor has no predecessor company. A predecessor is a company from which the franchisor acquired a major portion of its assets, and a negative history with a predecessor could be a red flag. The absence of a predecessor simplifies the due diligence process regarding the company's history.

Potential Mitigations

• Your attorney should always confirm the accuracy of the predecessor disclosure in Item 1.
• Independent research, with the help of a business advisor, can sometimes uncover corporate history not detailed in the FDD.
• When speaking with the longest-tenured franchisees, asking about the system's history is a good due diligence step.

Explanation

This risk was not identified in the FDD Package. Item 3 states that there has been no litigation that requires disclosure under FTC rules. A pattern of litigation, particularly claims of fraud or misrepresentation brought by franchisees, can be a major warning sign about a franchise system's health and its relationship with its franchisees.

Potential Mitigations

• Your attorney can conduct independent searches for litigation involving the franchisor that may not have met the threshold for disclosure in Item 3.
• Asking current and former franchisees about any formal or informal disputes they have had with the franchisor is a key due diligence step.
• Always have an attorney review Item 3, as the nature, frequency, and outcome of disclosed lawsuits are critical indicators of risk.