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 after public interest wanes. It is important to assess whether a franchise concept has sustainable, long-term consumer demand or if its appeal is based on a short-lived novelty. Your franchise agreement obligations will continue even if the business concept's popularity fades, so a careful market assessment is a key part of due diligence.

Potential Mitigations

• A business advisor can help you research the industry to assess the long-term market demand for the products and services offered.
• Discuss the franchisor's plans for innovation, product development, and adaptation to changing consumer tastes with their management.
• Your financial advisor can assist in evaluating the business model's resilience to economic shifts and evolving trends.

Explanation

This specific risk was not identified in the FDD package, as Item 1 does not indicate ownership by a private equity firm. When a franchisor is owned by a private equity fund, there can be a risk that decisions are driven by short-term financial targets to maximize returns for investors, which may not always align with the long-term health of franchisees. This could manifest in cost-cutting on support, pressure to use affiliated vendors, or a focus on rapid sales over franchisee success.

Potential Mitigations

• If considering a PE-owned franchise, it is important to research the firm's reputation and track record with other franchise brands they have owned.
• Your attorney can help assess how the franchise agreement protects franchisees in the event the system is sold.
• Discussions with a business advisor can help evaluate the alignment of the PE firm's strategy with long-term franchisee goals.

Explanation

This risk was not identified in the FDD package, as Item 1 does not indicate the existence of a parent company. In some cases, a franchisor might be a thinly capitalized subsidiary of a larger parent company. If the parent's financial statements are not provided when they are guaranteeing performance or are otherwise critical to the franchisor's viability, a prospective franchisee may lack a complete picture of the overall financial health and backing of the franchise system.

Potential Mitigations

• Your attorney can help you investigate the corporate structure to determine if any undisclosed parent entities exist that exert significant control.
• Should a parent company exist, it's wise to have your accountant review its financial statements for a complete picture of the system's stability.
• Legal counsel can advise on whether a parent company guarantee of the franchisor's obligations is necessary and how to secure one.

Explanation

Item 1 states that CAC Franchising does not have any predecessors. Therefore, the risk of inheriting historical issues from a prior company that operated the franchise system is not present. When a franchisor does have a predecessor, it is important to investigate the predecessor's history, including any past litigation, bankruptcy, or high franchisee turnover, as these could signal inherited systemic problems that may affect your business.

Potential Mitigations

• When a predecessor is disclosed, your attorney should carefully review their history as detailed in Items 1, 3, and 4.
• A business advisor can assist in researching a predecessor's public reputation and past performance.
• It is good practice to ask long-term franchisees about their experiences under any prior ownership.

Explanation

Item 3 states that no litigation is required to be disclosed. This is a positive finding, as a pattern of lawsuits, particularly those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a significant warning sign. A clean litigation history suggests a potentially more stable and less contentious relationship between the franchisor and its franchisees. You should still perform your own due diligence and speak with current and former franchisees.

Potential Mitigations

• Even with no disclosed litigation, asking your attorney about conducting a public records search for any undisclosed legal actions is a prudent step.
• You should discuss any concerns about potential disputes with current and former franchisees.
• A business advisor can help you assess the overall health of franchisor-franchisee relations through due diligence calls.