Explanation

This risk was not identified. The data in Item 20 indicates the system has been shrinking slightly, not growing rapidly. Rapid growth can sometimes strain a franchisor's ability to provide adequate support to all franchisees. It is important for a system's support infrastructure to keep pace with its unit growth to maintain quality and franchisee satisfaction across the board.

Potential Mitigations

• Analyzing outlet growth trends over several years in Item 20 with your accountant can reveal if support resources might be stretched thin.
• It is wise to ask current franchisees about the quality and timeliness of support they receive from the franchisor.
• A business advisor can help you evaluate if a franchisor's infrastructure and personnel are equipped to handle their projected growth.

Explanation

This risk was not identified in the FDD package. M&T Pizza Incorporated (M&T Pizza) has been franchising since 1977, indicating a long operational history. An unproven system can present higher risks, as its business model may not be time-tested, and its brand recognition is likely to be minimal. Prospective franchisees should be cautious with new systems.

Potential Mitigations

• When evaluating any franchise, your business advisor should help you research the franchisor's history and the track record of its management team.
• Asking early adopters in a system about their experiences can provide valuable insight.
• An accountant can help scrutinize the financial stability of a newer franchisor to ensure it has adequate capitalization.

Explanation

This risk was not identified. The pizza restaurant industry is a well-established and mature market, not a temporary fad. Investing in a fad business is risky because consumer interest may decline rapidly, potentially leaving you with a worthless business and ongoing contractual obligations long after the trend has passed. Evaluating a concept's long-term consumer demand is a critical step in due diligence.

Potential Mitigations

• A business advisor can help you research the long-term market viability of any business concept you are considering.
• It is prudent to assess a franchisor's plans for innovation and adaptation to stay relevant in a changing market.
• Discussing the sustainability of the business model with a financial advisor is a recommended step before investing.

Explanation

This risk was not identified, as there is no disclosure of private equity ownership in Item 1. When a franchisor is owned by a private equity firm, there can be a focus on short-term returns which may not always align with the long-term health of franchisees. This can sometimes lead to increased fees, reduced support, or a quick resale of the entire system.

Potential Mitigations

• If a franchisor is PE-owned, a business advisor can help you research the firm's reputation and its track record with other franchise brands.
• Speaking with franchisees who have been in the system before and after a PE acquisition can offer valuable perspectives.
• Your attorney should review any clauses in the Franchise Agreement that permit the franchisor to sell the system without franchisee consent.

Explanation

This risk was not identified. The FDD appears to disclose the primary franchising entity and its affiliates as required. When a franchisor is a subsidiary of a larger parent company, it is important that the parent is disclosed and, if it guarantees the franchisor's obligations, that its financial statements are also provided. This ensures a complete picture of the financial backing and stability of the system.

Potential Mitigations

• Your attorney can help you verify the corporate structure of the franchisor to ensure all relevant parent and affiliate companies are disclosed.
• An accountant should review the financials of any parent company that guarantees the franchisor's performance.
• If a parent company is a critical supplier, your business advisor can help assess the risks of that dependency.

Explanation

This risk was not identified. Item 1 mentions a predecessor entity but does not disclose any negative history associated with it. When a franchisor has a predecessor, it is important to understand that entity's history, including any past litigation, bankruptcy, or high franchisee turnover. Undisclosed issues from a predecessor can sometimes carry over to the new entity, affecting the health of the system.

Potential Mitigations

• It is always a good practice for your attorney to carefully review any predecessor information disclosed in Items 1, 3, and 4.
• A business advisor can assist you in researching a predecessor's public track record if a franchise system was acquired.
• Speaking with long-term franchisees who operated under a predecessor can provide crucial historical context.

Explanation

This risk was not identified, as Item 3 states there is no litigation that requires disclosure. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag. Similarly, a high number of lawsuits initiated by the franchisor against its franchisees might suggest an overly aggressive or litigious culture, which could create a difficult operating environment.

Potential Mitigations

• Your attorney should always carefully review the details of any litigation disclosed in Item 3.
• Even with no disclosed litigation, speaking with current and former franchisees can provide insight into the franchisor-franchisee relationship.
• A business advisor can help you research public records for any litigation that may not have met the threshold for disclosure.