Explanation

This risk was not identified in the FDD package. The data in Item 20 shows the system has been shrinking, not growing rapidly. Generally, a franchisor expanding too quickly can strain its ability to provide adequate training, site selection assistance, and operational support to new franchisees, potentially harming the entire system.

Potential Mitigations

• A business advisor can help you evaluate if a franchisor's support infrastructure is sufficient for its current size and any future growth plans.
• Franchisee interviews are a good way to gauge the current quality and responsiveness of franchisor support.
• An accountant's review of the franchisor's financials can help determine if they have the resources to properly support their system.

Explanation

This risk was not identified in the FDD package. Bruegger's began franchising in 1993 and is an established brand with a long operational history. An unproven system presents higher risks, as its business model, brand recognition, and support structures have not yet stood the test of time, which can lead to a higher rate of failure.

Potential Mitigations

• When considering any franchise, it's wise to have your business advisor research the franchisor's history and the experience of its management team.
• Speaking with the earliest franchisees of any system provides insight into how it has evolved and handled challenges.
• Your attorney can help you understand the protections available when investing in a newer, less-proven franchise system.

Explanation

This risk was not identified in the FDD package. The business model, centered on bagels and cafe fare, is a well-established segment of the restaurant industry and not considered a fad. A fad-based business carries the risk that consumer interest will decline, leaving you with a business that is no longer viable, even though your contractual obligations to the franchisor remain.

Potential Mitigations

• A business advisor can help you research the long-term consumer demand and market trends for any industry you consider entering.
• It is important to evaluate a franchisor's plans for product innovation and adaptation to stay relevant over time.
• Your financial advisor can help assess a business model's resilience to shifting consumer tastes and economic downturns.

Explanation

This risk was not identified in the FDD package. The management team detailed in Item 2 has extensive experience in the restaurant and franchise industries. Inexperienced management can be a significant risk, as they may lack the specific skills needed to run a franchise system effectively, provide adequate support, or make sound strategic decisions, even if they have general business knowledge.

Potential Mitigations

• A thorough review of the backgrounds of the key management team, with help from a business advisor, is crucial for any franchise investment.
• In any franchise system, speaking with existing franchisees can provide valuable insight into the quality and effectiveness of the management team.
• Your attorney can help you understand what contractual commitments for support are made, regardless of management's experience level.

Explanation

This risk was not identified in the FDD package. Item 1 discloses the parent company structure, and Item 21 provides audited financial statements for the guarantor, Caribou Coffee Company, Inc. Failing to disclose a parent company or provide its financials when it guarantees the franchisor's performance can obscure significant risks and is a violation of disclosure laws.

Potential Mitigations

• An attorney should always verify that the corporate structure is clearly disclosed and that financials are provided for any entity guaranteeing the franchisor's obligations.
• If a franchisor is a new or thinly capitalized entity, it is critical to have your accountant assess the financial strength of any parent company.
• Understanding the relationships between the franchisor, its parents, and its affiliates is a key part of due diligence your business advisor can assist with.

Explanation

This risk was not identified in the FDD package. The FDD identifies Bruegger's Enterprises, Inc. as a predecessor but does not disclose any negative history such as bankruptcy or significant litigation associated with it. When a franchisor has a predecessor, it is important to investigate that entity's history, as it can reveal inherited problems or past issues with the franchise system.

Potential Mitigations

• Your attorney can help you carefully review Items 1, 3, and 4 of any FDD for information about a franchisor's predecessors.
• With a business advisor, you can conduct independent research into a predecessor's public records and reputation.
• Speaking with long-term franchisees who operated under the predecessor can provide invaluable historical context.