Explanation

The franchisor's audited financial statements in Item 21 do not indicate financial instability; in fact, they show increasing revenue and net income. It is still crucial for your accountant to review these statements to assess long-term trends and capitalization. A financially weak franchisor might be unable to provide adequate support, invest in the brand, or even remain in business, posing a significant risk to your investment.

Potential Mitigations

• A franchise accountant should independently review the franchisor's financial statements for the last three years to assess trends and capitalization.
• Engaging your business advisor to evaluate the franchisor's business model and its reliance on franchise fees versus ongoing royalties is wise.
• Legal counsel can help you understand any disclosures about financial performance guarantees or required bonds, if present.

Explanation

The FDD does not indicate a high franchisee turnover rate. Item 20 data for 2024 shows 0 terminations, 0 non-renewals, and a low number of closures relative to the total number of operating stores. High turnover can be a major red flag, suggesting potential issues with profitability, franchisee satisfaction, or franchisor support, so its absence here is a positive indicator.

Potential Mitigations

• It is still recommended to contact a significant number of current and former franchisees from the lists in Item 20 to discuss their experiences.
• Your business advisor can help you analyze the Item 20 tables for any concerning trends over the three-year period provided.
• Inquire with your attorney about the legal definitions of termination versus 'ceased operations' to better understand the data.

Explanation

This risk is not present, as the franchisor, Bruster's Limited Partnership (BLP), has been in business and franchising since 1993. An unproven system would pose higher risks related to the business model's viability, brand recognition, and the quality of support. With a new system, it is vital for a prospective franchisee to vet management's experience and the concept's long-term sustainability.

Potential Mitigations

• For any franchise, it is wise for your business advisor to research the company’s history and the experience of its leadership team.
• Speaking with the earliest-opening franchisees on the Item 20 list can provide insight into the system's evolution and consistency.
• Your accountant should always review the franchisor’s financial statements, regardless of its age, to assess its current financial health.

Explanation

The franchise operates in the well-established ice cream industry and has operated since 1993, so it does not appear to be a fad. A fad business, tied to a fleeting trend, presents a significant risk because consumer demand may disappear, leaving you with a long-term contractual obligation for a business that is no longer viable.

Potential Mitigations

• A business advisor can help you research the long-term consumer demand and competitive landscape for any franchise concept.
• Examining the franchisor's plans for product innovation and adaptation in Item 11 is a good practice.
• Your financial advisor can help assess a business model's resilience to economic shifts and changing consumer tastes.

Explanation

The management team described in Item 2 appears to have substantial experience in franchising and the food service industry, with many long-tenured executives. Inexperienced leadership can be a risk factor, as it may lead to poor strategic decisions, weak operational systems, and inadequate franchisee support. It is always important to assess the background of the key personnel guiding the franchise system.

Potential Mitigations

• Your business advisor can assist in researching the backgrounds and track records of the franchisor's key executives.
• Asking current franchisees about their confidence in the leadership team during validation calls provides valuable insight.
• An attorney can help you understand the implications if there are frequent changes in key management positions.

Explanation

The franchisor, Bruster's Limited Partnership (BLP), does not appear to be owned by a private equity firm; Item 1 indicates it is controlled by its founder. When a PE firm owns a franchisor, there can be a risk that decisions are focused on short-term investor returns rather than the long-term health of franchisees. This could manifest as reduced support, increased fees, or a quick sale of the system.

Potential Mitigations

• Your attorney can help you investigate the ownership structure of any franchisor to identify potential private equity involvement.
• If PE ownership is present, a business advisor can help research the firm's history with other franchise brands.
• It is important to have your lawyer review the assignment clauses in the Franchise Agreement to understand what happens if the system is sold.

Explanation

This risk was not identified, as Item 1 of the FDD discloses the affiliated entities that form the franchise system and Item 21 provides consolidated financials. In some cases, a franchisor might be a small subsidiary of a larger parent company. If the parent's financial information is not disclosed when required, it can hide risks related to the overall financial stability and backing of the franchise system.

Potential Mitigations

• Your attorney should always verify the corporate structure described in Item 1 to ensure all relevant parent and affiliate entities are disclosed.
• An accountant can determine if the provided financial statements give a complete picture of the entity you are contracting with.
• If a parent company guarantee is offered, it is crucial for your lawyer to review the terms of that guarantee.

Explanation

The FDD states that the franchisor has no predecessors, so this risk is not applicable. When a franchisor acquires a system from a predecessor, it is important to review the predecessor's history for any signs of trouble, such as litigation, bankruptcy, or high franchisee failure rates, as these issues could be inherited by the current franchisor.

Potential Mitigations

• Your attorney should confirm the franchisor's statements about predecessors in Item 1.
• If a predecessor exists, a business advisor can help you research its history and reputation.
• Speaking with franchisees who operated under the predecessor can provide valuable historical context.

Explanation

Item 3 of the FDD does not disclose any litigation against the franchisor. A pattern of litigation, particularly lawsuits initiated by franchisees alleging fraud or misrepresentation, can be a significant warning sign about the franchisor's practices and the health of the franchise relationship. It is always critical to carefully review any disclosures in Item 3.

Potential Mitigations

• Your attorney should always perform a thorough review of Item 3 for any disclosed litigation.
• A business advisor can help you assess whether the number and nature of any disclosed lawsuits suggest a systemic problem.
• If litigation is disclosed, asking the franchisees involved for their perspective can provide critical insights.