Explanation

This risk was not identified. Capriotti's has been franchising since 2008 and the original brand was established in 1976. Generally, investing in a new system carries higher risks due to an unproven business model and potential lack of robust support infrastructure, but that does not appear to be the case here based on system age.

Potential Mitigations

• When evaluating any franchise, your business advisor should help you investigate the franchisor's history and the operating history of its outlets.
• A thorough review of the management team's experience in both the industry and franchising is a critical step, which your attorney can assist with.
• An accountant can assess the financial stability and track record of the franchisor, which is especially important for newer systems.

Explanation

This risk is not apparent. The business model, which focuses on submarine and deli sandwiches, is part of a long-established and competitive segment of the restaurant industry, not a niche or trendy fad. The risk with fad-based businesses is that consumer interest may decline, leaving you with a long-term contract for a business with waning demand.

Potential Mitigations

• When considering any business, it is wise to have a business advisor help you research the long-term market demand for its core products or services.
• An accountant can help you analyze if the business model is resilient to economic downturns and changing consumer tastes.
• Evaluating the franchisor's plans for innovation and adaptation with your business advisor can provide insight into its long-term viability.

Explanation

This risk was not identified. Item 2 indicates that key members of the management team have extensive experience with the Capriotti's brand, with some executives having been involved for over a decade. Inexperienced management can be a significant risk, often leading to poor strategic decisions and inadequate support, but that does not appear to be a concern here.

Potential Mitigations

• An essential part of due diligence is to have your business advisor help you vet the backgrounds of the key management team.
• Consulting with existing franchisees about their perception of management's competence and the quality of support is a crucial step.
• Your attorney should review the business experience listed in Item 2 for any red flags.

Explanation

The FDD does not disclose direct ownership by a private equity firm. However, the financial statements reveal complex financing arrangements with various investment entities. With any franchise, it's important to understand the ownership structure, as private equity ownership can sometimes lead to decisions that prioritize short-term investor returns over the long-term health of franchisees.

Potential Mitigations

• Your attorney should research the franchisor's corporate structure to understand who holds ultimate control.
• Discussing any recent changes in ownership or management philosophy with existing franchisees can provide valuable insight.
• An accountant should review the financial statements for signs of aggressive financial engineering or high debt loads.

Explanation

This risk was not identified, as Capriotti's appears to be the top-level entity and it provides consolidated financial statements. Generally, if a franchisor is a subsidiary of another company, the parent's financial health can be critical. A failure to disclose a parent or its financials when required could hide significant risks from a prospective franchisee.

Potential Mitigations

• An attorney can help verify the franchisor's corporate structure to ensure there is no undisclosed controlling parent company.
• If a parent company exists and guarantees performance, an accountant must review the parent's financial statements for stability.
• Your attorney should confirm that all material affiliates are properly disclosed in Item 1.

Explanation

This risk was not identified as the FDD states there are no predecessors. When a franchisor acquires a system from a predecessor, it's important to understand that history. A predecessor's record of litigation, bankruptcy, or high franchisee turnover could indicate underlying problems with the system that may persist under new ownership.

Potential Mitigations

• Your attorney should always review Item 1 carefully for any mention of predecessors.
• If a predecessor exists, researching their business history and reputation can be an important due diligence step for your business advisor.
• Speaking with long-term franchisees who operated under a predecessor can provide invaluable historical context.

Explanation

This risk was not identified, as Item 3 discloses no reportable litigation. A pattern of lawsuits filed by franchisees alleging fraud or by the franchisor against franchisees can be a major red flag indicating systemic problems. The absence of such litigation is a positive sign, suggesting a potentially healthier franchisor-franchisee relationship.

Potential Mitigations

• Your attorney should always conduct an independent search for litigation beyond what is disclosed in Item 3.
• Reviewing Item 3 is a critical step to identify any history of disputes with franchisees.
• Discussions with current and former franchisees can help uncover any unreported disputes or a litigious culture.