Explanation

This risk was not identified in the FDD package. Item 20 data shows very low franchisee turnover, with no terminations, non-renewals, or stores ceasing operations in the past three years. Low turnover can be a positive indicator of system health and franchisee satisfaction. A high rate of turnover, in contrast, often signals systemic problems with profitability, franchisor support, or the overall business model.

Potential Mitigations

• Even with low reported turnover, it is valuable to speak with current and former franchisees from the list in Exhibit H to confirm their satisfaction; a business advisor can help prepare questions.
• Your accountant should review the Item 20 tables to confirm the low turnover rates for all years presented.
• Discuss the franchise relationship and the reasons for any transfers with your attorney to gain a complete picture.

Explanation

The franchise system is growing steadily, expanding from 15 to 25 franchised units between the end of 2022 and the end of 2024. While growth is a positive sign, it must be managed with adequate support infrastructure. The franchisor's weak financial position, despite being profitable in 2024, could present a risk to its ability to scale support services to match this expansion rate, potentially straining resources.

Potential Mitigations

• Asking the franchisor about their specific plans to scale support staff and systems to match unit growth is a key due diligence step for you and your business advisor.
• In discussions with existing franchisees, inquire about the current quality and responsiveness of the franchisor's support systems.
• Have your accountant review the franchisor's financials in Item 21 to assess if they have the cash flow to support continued growth.

Explanation

The franchisor, BSI, has been in business since 2006 and franchising since that time, so it is not a new or unproven system. The management team listed in Item 2 also includes individuals with prior experience at other large franchise systems. This history and experience can reduce risks associated with unproven models, lack of brand recognition, or underdeveloped support systems that are often found in newer franchise offerings.

Potential Mitigations

• A business advisor can help you assess how the franchisor's years of experience translate into mature systems and support.
• Speaking with long-term franchisees can provide valuable insight into how the system has evolved and improved over time.
• Your attorney can help you understand how the franchisor's history might influence the terms offered in the Franchise Agreement.

Explanation

This specific risk was not identified in the FDD package. The business model, a specialty butcher shop and gourmet market, represents an established retail concept rather than a new or trendy one. A key risk in franchising is investing in a concept based on a short-term trend or fad, which could lead to business failure when consumer interests change. This franchise appears to be based on a more traditional and durable market segment.

Potential Mitigations

• A business advisor can help you research the long-term market demand and competitive landscape for gourmet food and butcher shops in your local area.
• Evaluating the franchisor's plans for product innovation and adaptation to changing consumer tastes is a prudent step.
• Your financial advisor can assist in assessing the business model's resilience to economic shifts and changing food trends.

Explanation

This risk was not identified in the FDD package. Item 2 indicates that the management team has relevant prior experience in the franchising and food service industries, including at large, established brands like Denny's. Inexperienced management can pose a significant risk, as it may lead to poor strategic decisions, weak operational systems, and inadequate support for franchisees. The disclosed experience of the leadership team helps to mitigate this particular concern.

Potential Mitigations

• It is still valuable to discuss the management team's specific roles and performance with current franchisees.
• A business advisor can help you further research the professional backgrounds of the key executives listed in Item 2.
• Asking the franchisor direct questions about their management philosophy and support structure can provide additional insight.

Explanation

This risk was not identified in the FDD package. Item 1 and the accompanying financial statements indicate the franchisor is privately owned by its founders and is not controlled by a private equity firm. This can be a positive, as it may suggest a focus on the long-term health of the brand rather than short-term investor returns, which can sometimes lead to decisions that are not in the best interest of franchisees.

Potential Mitigations

• Your attorney can help you confirm the ownership structure and identify any majority stakeholders.
• Discussing the long-term vision for the company with the franchisor can provide insight into their goals.
• A business advisor can help you understand the potential benefits and drawbacks of different ownership structures.

Explanation

The franchisor discloses its parent company, Butcher Shoppe International, LLC, in its financial statements. An affiliate, BSI of Georgia, LLC, also provides a Guarantee of Performance, and its financials are included. This level of disclosure provides a more complete picture of the corporate structure and financial backing. A failure to disclose a parent or its financials when required can obscure significant risks related to the system's stability or true leadership.

Potential Mitigations

• Your accountant should review the financial statements for the franchisor, its parent (if provided), and any guarantors to get a complete financial picture.
• It is important for your attorney to review the terms of any parent guarantees to understand what obligations are actually covered.
• A business advisor can assist in researching the history and reputation of the parent and affiliate companies.

Explanation

This risk was not identified in the FDD package. Item 1 indicates the current franchisor was formed in 2006 after its principals, who were franchisees themselves, purchased the original franchisor. While this constitutes a predecessor, the history is straightforward and has been continuous for over 15 years under the current ownership. Inadequate disclosure of a predecessor's negative history, such as bankruptcies or high failure rates, can hide significant systemic risks.

Potential Mitigations

• Your attorney should carefully review all disclosures related to the predecessor entity.
• Speaking with long-tenured franchisees about their experience before and after the current ownership took over can provide valuable context.
• A business advisor can help you research the public record of any predecessor companies for additional information.

Explanation

This risk was not identified in the FDD package. Item 3 states that there is no litigation that requires disclosure. A pattern of lawsuits, especially those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a significant red flag indicating systemic problems within a franchise. Likewise, an unusually high number of lawsuits initiated by the franchisor against its franchisees can suggest an overly aggressive or litigious relationship.

Potential Mitigations

• An attorney can perform independent searches for litigation involving the franchisor that may not have met the criteria for disclosure in Item 3.
• It is wise to ask current franchisees about their experiences with disputes and how the franchisor handles disagreements.
• Your business advisor can help you research online reviews and forums for discussions of franchisee disputes.