Explanation

This risk was not identified in the FDD package. Item 20 data shows a stable system with only two franchisees and no terminations, non-renewals, or other cessations over the last three years. Generally, high franchisee turnover can be a major red flag, indicating potential issues with profitability, franchisor support, or the overall business model.

Potential Mitigations

• It is always a good practice to speak with current and former franchisees, as your business advisor would recommend, to understand their experiences.
• Your attorney can help you formulate questions for the franchisor about their long-term plans for system growth and franchisee success.
• An accountant can assist in reviewing the turnover data in any FDD to calculate the actual churn rate.

Explanation

While the gourmet food truck and fast-casual sandwich market is competitive, the core offering of grilled cheese and comfort food is a well-established concept rather than a fad. The affiliate has been operating since 2014, suggesting some level of sustained customer interest. However, market tastes can change, and long-term success will depend on adaptation and execution.

Potential Mitigations

• With your business advisor, research the local market to assess long-term demand for this specific type of fast-casual concept.
• Ask the franchisor about their plans for menu innovation and concept evolution to stay relevant over the next ten years.
• Reviewing the competitive landscape with a real estate professional can help gauge the concept's unique selling proposition.

Explanation

This risk was not identified in the FDD package. The franchisor appears to be owned by its founding members, not a private equity firm. When a PE firm owns a franchisor, there can be a risk that short-term financial goals are prioritized over the long-term health of the franchise system and its franchisees.

Potential Mitigations

• It is always wise to ask your attorney to verify the ownership structure of the franchisor entity.
• A business advisor can help you understand the potential implications of different ownership structures on a franchise system.
• When reviewing any franchise, asking current franchisees about their relationship with ownership provides valuable insight.

Explanation

This risk was not identified. Item 1 appears to properly disclose the affiliate structure and does not indicate the existence of a parent company. In some cases, a franchisor might be a thinly capitalized subsidiary, and the failure to disclose a controlling parent company could obscure the true financial backing and stability of the system.

Potential Mitigations

• Your attorney should always confirm the corporate structure and identify all relevant parent and affiliate companies.
• If a parent company exists and provides a guarantee, your accountant should review its financial statements.
• Understanding the full corporate family helps a business advisor assess where operational control and financial strength truly reside.

Explanation

This risk was not identified. Item 1 explicitly states there are no predecessor entities that require disclosure. A predecessor is a company from which the franchisor acquired the major portion of its assets, and a review of its history (including any litigation or bankruptcy) can be critical for understanding the franchise system's background and potential inherited issues.

Potential Mitigations

• Your attorney should always verify statements about predecessors and corporate history in Item 1.
• For any franchise, researching the history of the brand and its founders can provide valuable context, a task your business advisor can assist with.
• Independent online searches for the brand name and founders can sometimes uncover history not present in the FDD.

Explanation

This risk was not identified. Item 3 discloses no history of litigation involving the franchisor, its management, or affiliates. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, is a significant red flag. The absence of litigation is a positive indicator, though it is not a guarantee of future performance or satisfaction.

Potential Mitigations

• While a clean Item 3 is positive, your attorney can conduct independent litigation searches to double-check for any non-disclosed or recent legal actions.
• Speaking with former franchisees, if any are listed in Item 20, is a key way to uncover past disputes that may not have resulted in litigation.
• Always have your attorney review the dispute resolution clauses in the Franchise Agreement to understand how future conflicts would be handled.