Explanation

This specific risk was not identified in the FDD Package. The franchisee turnover rates disclosed in Item 20 for the past three years appear to be low, with the system showing consistent net growth in the number of franchised outlets. High turnover can be a major red flag indicating systemic problems, so its absence here is a positive sign. However, you should still verify the reasons for any closures or transfers.

Potential Mitigations

• Speaking with former franchisees from the list in Exhibit C is a crucial step your business advisor can help you with to understand their reasons for leaving the system.
• An accountant should still analyze the Item 20 data over the three-year period to confirm the low turnover rates and identify any subtle trends.
• Your attorney can help you frame questions for the franchisor about the circumstances surrounding any outlets that have ceased operations.

Explanation

This risk was not identified in the FDD Package. Item 1 indicates that Cheba Hut Franchising, Inc. has been franchising since 2002 and Item 20 shows a substantial number of operating units. This demonstrates a long operational history and a proven track record, which is generally a positive indicator for a prospective franchisee. A new or unproven system would present higher risks related to brand recognition and untested support systems.

Potential Mitigations

• You should still review the system's history and development timeline with a business advisor to understand its evolution and market position.
• Verifying the franchisor's experience by speaking with long-tenured franchisees is a prudent step.
• Your attorney can confirm the franchisor's corporate history and standing as disclosed in Item 1.

Explanation

This risk was not identified in the FDD Package. While the brand has a distinctive cannabis-related theme, the core business is selling toasted submarine sandwiches, a well-established and durable segment of the restaurant industry. The franchisor's operating history since 2002 suggests the concept has sustained demand beyond being a short-term fad. A fad business carries the risk of declining consumer interest, which does not appear to be the primary concern here.

Potential Mitigations

• It is still wise to have a business advisor help you research the long-term consumer trends for quick-service sandwich restaurants in your specific market.
• You should discuss the brand's unique marketing theme with current franchisees to understand its reception in different types of communities.
• An attorney can review any restrictions related to the brand's theming that might arise in local zoning or advertising regulations.

Explanation

This risk was not identified in the FDD Package. The executive biographies in Item 2 show that the key management team possesses significant and long-term experience with the Cheba Hut brand and within the restaurant industry. Inexperienced management can be a major risk, as it may lead to poor strategic decisions and inadequate franchisee support. The experience detailed in the FDD is a positive factor.

Potential Mitigations

• A business advisor can help you assess how the management team's experience aligns with the company's growth plans.
• You should still ask current franchisees about their direct experiences and the quality of support they receive from the leadership team.
• Your attorney can help verify the professional backgrounds of the key executives mentioned in Item 2.

Explanation

This risk was not identified in the FDD Package. Item 1 does not indicate that the franchisor is owned or controlled by a private equity firm. PE ownership can sometimes introduce risks related to prioritizing short-term financial returns over the long-term health of the franchise system. The absence of this ownership structure can be a neutral or positive factor.

Potential Mitigations

• It is still prudent to ask your attorney to help you understand the complete ownership structure of the franchisor as detailed in Item 1.
• A business advisor can help you research the history of the company's ownership to identify any recent changes.
• You should inquire with the franchisor about any potential plans for a future sale of the company.

Explanation

This risk was not identified in the FDD Package. Item 1 states that the franchisor does not have a parent company. It does properly disclose its affiliate, Cheba Hut IP Holdings, Inc., which owns the trademarks. The necessary disclosures appear to be present, and there is no indication that a required parent company's information has been omitted.

Potential Mitigations

• Your attorney should still review the affiliate relationships described in Item 1 to ensure you understand their roles and impact on your franchise.
• Have your accountant confirm that the financial statements provided are for the correct legal entity offering the franchise.
• A business advisor can help you clarify the relationship between the franchisor and its affiliates during your discussions with the company.

Explanation

This risk was not identified in the FDD Package. Item 1 clearly states that the franchisor has no predecessors. This means the company's history as disclosed in Items 3, 4, and 20 is its own, without any inherited issues from prior entities. This provides a more straightforward basis for due diligence.

Potential Mitigations

• Your attorney should confirm the corporate history as stated in Item 1 to ensure no predecessor entities have been overlooked.
• When speaking with long-tenured franchisees, you can ask about the history of the company to verify this disclosure.
• A business advisor can help you focus your due diligence on the franchisor's direct operational history.

Explanation

This risk was not identified in the FDD Package. Item 3 discloses that there is no material litigation required to be reported. A pattern of litigation, particularly lawsuits from franchisees alleging fraud or misrepresentation, can be a significant warning sign of systemic problems. The absence of such disclosures is a positive indicator.

Potential Mitigations

• It is still wise for your attorney to conduct an independent public records search to confirm that no significant litigation has been omitted or has arisen since the FDD was issued.
• Asking current and former franchisees about their experiences and whether they have had disputes with the franchisor is a valuable due diligence step.
• A business advisor can help you understand common areas of dispute in franchising, even if none are disclosed here.