Explanation

As a new franchise system, there is no history of franchisee turnover to analyze in Item 20. While this means no negative data is present, it also signifies a lack of a proven track record with independent franchisees. You would be among the first to test the system's viability, support structure, and profitability from a franchisee's perspective. The risks associated with an unproven system are inherently higher.

Potential Mitigations

• Your business advisor should help you perform heightened due diligence on the franchisor’s operational and support capabilities.
• Since no franchisee data is available, your accountant should help you create very conservative financial projections.
• Engaging an attorney to negotiate for protections, such as enhanced support guarantees or more favorable termination rights, is advisable given the pioneer status.

Explanation

This risk was not identified in the FDD package. While the system is new and not yet growing rapidly, it's important to monitor growth in the future. Overly rapid expansion can strain a franchisor's resources, potentially leading to a decline in the quality and availability of essential franchisee support, training, and site selection assistance. Your business success is tied to the franchisor's ability to support its system effectively as it grows.

Potential Mitigations

• Asking the franchisor about their strategic growth plans and how they intend to scale support infrastructure is a prudent step to take with your business advisor.
• Your accountant can help you monitor the franchisor's financial statements in future FDDs for signs of investment in support staff and systems.
• It is wise to maintain communication with other franchisees as the system grows to gauge their satisfaction with support levels.

Explanation

This risk was not identified in the FDD package. The business operates in the established fast-casual Mexican grill restaurant sector, which has demonstrated sustained consumer demand. Fad businesses, tied to fleeting trends, can pose a risk because franchisee obligations under the contract continue even if consumer interest disappears. A strong concept should have long-term market appeal and show potential for evolution.

Potential Mitigations

• Your business advisor can help you independently research the long-term market trends for the industry and the specific concept.
• It is beneficial to evaluate the franchisor's stated plans for menu innovation, marketing, and brand development to ensure a long-term vision.
• An accountant can assist in modeling the business's resilience to potential economic downturns or shifts in consumer tastes.

Explanation

This risk was not identified in the FDD package. The franchisor, Fresh Mex, appears to be owned by its management team, not a private equity firm. Private equity ownership can introduce risks, as their focus may be on short-term investor returns through strategies like cost-cutting on support or rapid expansion, rather than the long-term health of franchisees. It is a factor worth monitoring for any franchise system over time.

Potential Mitigations

• In any franchise review, it is good practice for your attorney to research the ownership structure for any private equity involvement.
• A business advisor can help you investigate a private equity firm's track record with other franchise brands they may have owned.
• Understanding the franchisor's assignment rights in the Franchise Agreement is crucial, as the system could be sold to a PE firm in the future.

Explanation

This risk was not identified in the FDD package. Fresh Mex is a new entity and does not list any predecessors from which it acquired assets. In cases where a franchisor has predecessors, it is important to review their history for any red flags, such as past litigation, bankruptcy, or high franchisee turnover, as these issues could potentially carry over to the new entity. This review helps provide a more complete picture of the franchise system's lineage.

Potential Mitigations

• Your attorney should always carefully review Item 1 for any disclosed predecessors and investigate their history if present.
• When predecessors exist, speaking with long-term franchisees who operated under them can provide valuable insight.
• A business advisor can help you research public records for information about any disclosed predecessor companies.

Explanation

This risk was not identified in the FDD package. Item 3 states that no litigation is required to be disclosed. A clean litigation history is a positive sign. However, it's important to remember that this is a new franchise system. A pattern of franchisee-initiated lawsuits alleging fraud or franchisor-initiated suits against franchisees can be a major red flag in more mature systems, indicating potential systemic problems.

Potential Mitigations

• Your attorney should confirm the absence of litigation and explain the types of lawsuits that are most concerning in a franchise context.
• It is good practice to periodically search public court records for litigation involving the franchisor, even after you have invested.
• Asking current franchisees, when they exist, about their relationship with the franchisor can provide context beyond formal litigation.