Explanation

As a new franchise system, there are no operating franchised outlets as of the FDD's issuance date. Therefore, this risk, which pertains to a high rate of franchisees leaving the system, is not applicable because there is no franchisee turnover data to analyze. The absence of a track record with independent franchisees is a separate risk related to an unproven franchise system.

Potential Mitigations

• It is crucial to engage a business advisor to assess the franchisor's support systems intended to prevent future franchisee turnover.
• Your attorney can help you understand the termination and renewal provisions that will govern your relationship and potential exit in the future.
• An accountant should help you model various financial scenarios, as there is no franchisee performance data to rely on.

Explanation

This risk was not identified in the FDD package. The Buona brand is based on Italian beef sandwiches, a concept its affiliates have operated in the Chicago market since 1981. This represents a long-established food service concept rather than a temporary or new trend. A fad business carries the risk of declining consumer interest, which could jeopardize the long-term viability of your investment.

Potential Mitigations

• Your business advisor can help you research the long-term consumer demand and market trends for the core products offered.
• An accountant can assist in modeling the financial resilience of the business in various economic cycles.
• Consulting with your attorney about the franchise term and your obligations is wise, ensuring you are not locked into a short-lived trend.

Explanation

This risk was not identified in the FDD package. FDD Item 1 indicates the franchisor, Chicago's Original Italian Beef Franchising, LLC, is a private company and does not disclose any ownership by a private equity firm. Private equity ownership can sometimes introduce risks related to short-term profit motives over the long-term health of the franchise system, which does not appear to be a factor here.

Potential Mitigations

• A business advisor can help you research the ownership structure and history of any franchise system you consider.
• Your attorney should always review assignment clauses to understand what happens if the franchisor is sold to any type of entity.
• An accountant can analyze the franchisor's financials for signs of debt-loading or cost-cutting often associated with certain ownership structures.

Explanation

This risk was not identified in the FDD package. FDD Item 1 discloses the franchisor and its affiliates but does not mention a parent company. The financial statements provided in Item 21 are for the franchisor entity itself. Therefore, there is no risk of a parent company's financials or influence being hidden. In some franchises, a thinly capitalized subsidiary's risks can be masked if the more stable parent's information is not disclosed.

Potential Mitigations

• Having your attorney confirm the complete corporate structure and identify all relevant entities is a prudent step in any franchise review.
• Your accountant should always verify that the financial statements provided are for the correct legal entity offering the franchise.
• A business advisor can help investigate the relationships between the franchisor and its affiliates to understand where operational control lies.

Explanation

This risk was not identified in the FDD package. FDD Item 1 states that the franchisor has no predecessors. A predecessor is a company from which the franchisor acquired a major portion of its assets. A lack of predecessors means the franchisor's own history, as disclosed in the FDD, is the only history to evaluate, simplifying due diligence in this area.

Potential Mitigations

• Your attorney should always verify the franchisor's corporate history as described in Item 1.
• When a predecessor is listed, it is crucial that your accountant and attorney review its litigation, bankruptcy, and franchisee turnover history.
• A business advisor can help research the reputation of any disclosed predecessor entities.

Explanation

This risk was not identified in the FDD package. Item 3 states, “No litigation is required to be disclosed in this Item.” This indicates the franchisor, its predecessors, and its key personnel have not been involved in the types of material litigation that require disclosure under federal and state franchise laws, such as lawsuits alleging fraud, misrepresentation, or franchise law violations. This is a positive indicator, though it does not guarantee a dispute-free future.

Potential Mitigations

• Your attorney can conduct an independent public records search to confirm the absence of significant litigation.
• It is always wise to ask existing franchisees about any disputes they may have had, even if they did not result in litigation.
• A business advisor can help you assess the franchisor's general reputation within the industry.