Explanation

The financial statements for BYC Franchising, LLC (BYC) indicate a strong and stable financial position. The company is highly profitable, has a very healthy current ratio, growing equity, and derives the majority of its revenue from royalties rather than initial franchise fees. The financial statements are audited by Moss Adams LLP and receive an unmodified opinion. These factors suggest a low risk of franchisor financial instability.

Potential Mitigations

• Your accountant should review the provided audited financial statements, including all notes, to confirm this assessment of financial health.
• A business advisor can help you assess how the franchisor's strong financial position may translate into better support and brand investment.
• Ask your attorney to confirm if any financial performance bonds or escrow accounts are required by state law, despite the strong financials.

Explanation

The FDD package does not indicate that the franchise system is experiencing excessively rapid growth. Item 20 data shows a steady addition of 1 to 4 new franchised units per year over the last three years. This appears to be a controlled growth rate, suggesting the franchisor is less likely to outpace its ability to provide adequate franchisee support.

Potential Mitigations

• A business advisor can help you compare the system's growth rate to others in the fast-casual restaurant industry.
• In discussions with current franchisees, it is wise to ask about their perception of the franchisor's ability to support all units effectively.
• Have your accountant review the franchisor's financial statements to confirm they have sufficient resources to manage their current growth trajectory.

Explanation

This risk was not identified in the FDD package. BYC has been franchising since 2010, its affiliate has operated a location since 1993, and there are approximately 40 units in the system. The management team has significant industry and brand experience. This indicates a mature and proven franchise system, not a new or unproven one.

Potential Mitigations

• Even with a proven system, it is beneficial to have a business advisor help you evaluate its current market position and growth potential.
• Discussing the system's evolution and brand strength with long-standing franchisees provides valuable historical context.
• Your accountant can confirm the system's stability through a detailed review of the provided multi-year financial statements.

Explanation

This risk was not identified in the FDD package. The Broken Yolk Cafe concept, focused on breakfast and lunch, has been in operation since 1993 through an affiliate location. This long operational history and steady system growth suggest a sustainable business model with enduring customer demand, rather than a concept based on a short-term trend or fad.

Potential Mitigations

• A business advisor can help you research the long-term market trends for breakfast and lunch-focused restaurant concepts.
• When speaking with franchisees, ask about their long-term outlook and the brand's ability to adapt to changing consumer tastes.
• Your financial advisor can assist in evaluating the business model's resilience to economic shifts and competitive pressures.

Explanation

This risk was not identified in the FDD package. The key executives, John and Chrisoula Gelastopoulos, have been with the brand since its inception and its predecessor since 1993. Other key personnel also have significant experience within the company or the broader restaurant industry. This indicates a seasoned management team with deep knowledge of both the brand and franchising.

Potential Mitigations

• It is still valuable to discuss management's accessibility and effectiveness with current franchisees.
• A business advisor can help you research the reputation of the key executives within the franchise industry.
• During any meetings with the management team, asking about their strategic vision for the brand can provide important insights.

Explanation

This FDD package does not indicate that the franchisor is owned by a private equity firm. The company, BYC Franchising, LLC, appears to be privately held by its founders. This avoids the specific risks often associated with private equity ownership, such as a focus on short-term returns over long-term system health.

Potential Mitigations

• Your attorney can verify the ownership structure of the franchisor through public records.
• A business advisor can help you understand the benefits and drawbacks of the current ownership structure.
• When speaking with the franchisor, you might inquire about any long-term plans for the ownership of the company.

Explanation

This risk was not identified in the FDD package. BYC clearly discloses its affiliate, BYC, Inc., and explains the relationship. As BYC Franchising, LLC has substantial assets and strong financials on its own, the FTC rule would not typically require the parent's financials. The disclosure appears to be transparent and sufficient in this regard.

Potential Mitigations

• An attorney can confirm that the disclosure of affiliates and the provision of financial statements comply with all federal and state requirements.
• Your accountant should still review the financial relationship between BYC and its affiliate as detailed in the financial statement notes.
• Understanding the specific roles of the franchisor versus its affiliate is important and can be clarified with a business advisor.

Explanation

Item 1 discloses that the affiliate, BYC, Inc., had a predecessor entity, but also states that the franchisor itself has had no predecessor in the last 10 years. Item 3 does disclose a regulatory action involving the affiliate that occurred prior to the franchisor's formation. While this history is noted, the franchisor entity itself has a clean record for its 10+ years of operation, mitigating this risk.

Potential Mitigations

• Your attorney should carefully review the disclosures in Items 1, 3, and 4 regarding any predecessor or affiliate history.
• Asking long-tenured franchisees about their experiences with the system's ownership and management over time can provide valuable context.
• A business advisor can help you understand the implications of the affiliate's past regulatory issue on the current franchising company.