Explanation

This risk was not identified in the FDD package. Rapid growth can strain a franchisor's ability to provide adequate support. While the number of affiliate-owned stores has grown, the number of franchised stores has sharply declined, indicating contraction rather than rapid expansion of the franchise system.

Potential Mitigations

• An accountant should review the franchisor's financial statements to assess if they have the resources to support future growth.
• Talking with franchisees about the current quality and responsiveness of franchisor support can provide valuable insight.
• A business advisor can help you evaluate if the support infrastructure seems adequate for the current system size.

Explanation

This risk was not identified in the FDD package. California Tortilla Group, Inc. (CTG) began franchising in 2003 and has an established operational history. Unproven systems carry higher risks related to brand recognition and support structures. However, the high franchisee turnover identified in Item 20 presents a different but significant set of risks regarding the system's current health.

Potential Mitigations

• A business advisor can help you evaluate the experience of the management team in both the industry and in franchising.
• Speaking with the earliest franchisees in the system can provide insight into the franchisor's evolution and support consistency.
• An accountant should still review the financials to ensure the business model has remained stable over time.

Explanation

This risk was not identified in the FDD package. A 'fad' business is one tied to a fleeting trend, which can threaten long-term viability. The fast-casual Mexican restaurant concept is well-established and has demonstrated sustained consumer demand over many years, suggesting it is not a fad.

Potential Mitigations

• A business advisor can help you independently assess the long-term market demand for the product and service.
• Evaluating the franchisor's plans for innovation and menu development can provide insight into their strategy for staying relevant.
• Consider the business model's resilience to economic shifts with your financial advisor.

Explanation

This risk was not identified in the FDD package. FDD Item 2 shows that the key executives have extensive experience, with most having been with the company or its affiliates since 2003. This longevity suggests a stable and experienced leadership team familiar with both the brand and the franchising industry, which is generally a positive factor for a franchisee.

Potential Mitigations

• You can verify the management team's experience and reputation by speaking with current and former franchisees.
• A business advisor can help you research the professional backgrounds of the key executives listed in Item 2.
• Always ask franchisees you speak with for their direct opinion on the competence and helpfulness of the management team.

Explanation

This risk was not identified in the FDD package. FDD Item 1 does not indicate that the franchisor is owned by a private equity firm. This type of ownership can sometimes lead to a focus on short-term returns over the long-term health of the franchise system. The ownership appears to be held by the founding management team.

Potential Mitigations

• It is still prudent to ask your attorney to verify the ownership structure of the franchisor entity.
• Discussing any known ownership changes with current franchisees can provide context on the franchisor's operational philosophy.
• A business advisor can help you research the background of the principal owners of the company.

Explanation

This risk was not identified in the FDD package. The franchisor does not appear to have a parent company. It discloses its affiliates, CalTort and CT-Potomac, which operate restaurants, and Southern Sauces, which is a supplier. The financials provided are for the franchisor entity itself and appear to be complete as required.

Potential Mitigations

• Your attorney can confirm the corporate structure and ensure that there are no undisclosed parent entities that should have been disclosed.
• If a franchisor is a subsidiary, an accountant should review both the franchisor's and any guaranteeing parent's financial statements.
• A business advisor can help you understand the relationships between a franchisor and its affiliates.

Explanation

This risk was not identified in the FDD package. The franchisor discloses one predecessor, Yeeha! LLC, from which it acquired the marks and system in 2003. The FDD appears to provide the required information regarding this predecessor, and no negative history associated with the predecessor is disclosed in Items 3 or 4.

Potential Mitigations

• Your attorney can review the predecessor disclosures to ensure they meet legal requirements.
• If a system has a predecessor, it's wise to ask long-tenured franchisees about their experiences under the previous ownership.
• Independent online research of a predecessor entity, with help from a business advisor, can sometimes reveal additional history.

Explanation

This risk was not identified in the FDD package. Item 3 states, 'No litigation is required to be disclosed in this Item.' The absence of a pattern of lawsuits filed by franchisees alleging fraud, or by the franchisor against franchisees for contract breaches, is a positive indicator for the health of the franchise system's relationships.

Potential Mitigations

• Your attorney can conduct independent searches for litigation involving the franchisor that may not have met the threshold for disclosure.
• Always ask current and former franchisees about their experiences with disputes and how the franchisor handles disagreements.
• Understanding the dispute resolution clauses in the Franchise Agreement is important, even in the absence of disclosed litigation.