Explanation

This risk was not identified in the FDD package. The data in Item 20 shows the franchise system has been contracting, not growing rapidly. Rapid growth can strain a franchisor's ability to provide necessary support, training, and quality control to its franchisees, potentially diluting the brand's value and leaving new owners without adequate assistance. It is often a sign of a franchisor prioritizing franchise sales revenue over sustainable system health.

Potential Mitigations

• A business advisor can help you analyze the franchisor's growth rate in Item 20 to ensure it is sustainable.
• Seeking insight from existing franchisees about the quality and timeliness of franchisor support is a valuable due diligence step.
• An accountant's review of the franchisor's financials in Item 21 can help determine if they have the resources to support their current size and any future growth.

Explanation

This risk was not identified. Item 1 indicates that Chili's Restaurants have been in operation since 1975 and franchised since 1984, demonstrating a long and established history. Investing in a new or unproven system carries higher risks, as the business model's long-term viability, brand recognition, and the franchisor's ability to provide effective support have not yet been fully established in the marketplace. Such systems may have a higher failure rate.

Potential Mitigations

• When evaluating any franchise, it is wise to have a business advisor help you assess the system's maturity and track record.
• An attorney can review the experience of the management team as detailed in Item 2 of the FDD.
• Speaking with the longest-operating franchisees can provide valuable perspective on the system's history and evolution.

Explanation

This risk was not identified. Chili's is a well-established brand in the casual dining segment of the restaurant industry, which is a mature market. A fad-based business is one that relies on a short-lived trend, posing a significant risk that customer demand will disappear long before your 20-year franchise agreement expires. This could leave you with a worthless business and ongoing financial obligations, such as lease payments and royalty fees.

Potential Mitigations

• A business advisor can help you research the long-term market demand and competitive landscape for any franchise concept.
• Careful review of the franchisor's history in Item 1 and its plans for future development in Item 11 can reveal its commitment to long-term relevance.
• Your accountant can assist in modeling a worst-case scenario where sales decline after an initial trend fades.

Explanation

This risk was not identified in the FDD. Item 2 details a management team with extensive experience in large, established restaurant and retail companies such as YUM! Brands and 7-Eleven. Franchisors with inexperienced management may lack the expertise to provide adequate support, create effective systems, or make sound strategic decisions for the brand. This can lead to significant operational and financial challenges for franchisees who rely on the franchisor's guidance.

Potential Mitigations

• A business advisor can help you research the backgrounds of the key executives listed in Item 2 of any FDD.
• It is always a good practice to ask existing franchisees about their direct experiences with the management team's competence and support.
• Your attorney can advise on the overall professionalism and completeness of the disclosure document, which can be an indicator of management's experience.

Explanation

This risk was not identified in the FDD package. Brinker International, Inc., the parent company, is a publicly traded corporation, not one owned by a private equity firm. Private equity ownership can introduce risks related to a focus on short-term returns, which may lead to increased fees, reduced franchisee support, and a higher likelihood of the franchise system being sold, creating uncertainty for franchisees' long-term investment.

Potential Mitigations

• A business advisor can help you investigate the ownership structure of any franchisor, which is disclosed in Item 1.
• If a franchisor is PE-owned, it's wise to research the firm's track record with other franchise brands they have managed.
• Your attorney can review the assignment clause in the franchise agreement to understand your rights if the system is sold.

Explanation

This risk was not identified. Item 1 clearly discloses the relationship between the franchisor, Brinker International Payroll Company, L.P., and its parent, Brinker International, Inc. Furthermore, Item 21 provides the parent's audited financial statements and a Guarantee of Performance. Failure to disclose a parent company or provide its financials when required can obscure the true financial health and control structure of the franchise system, which is a significant risk for prospective franchisees.

Potential Mitigations

• Your attorney should always verify that the entities disclosed in Item 1 align with the financial statements in Item 21 and any guarantees in Item 22.
• An accountant can determine if a parent company's financials should have been included based on FTC rules if they are missing.
• It's good practice to have a business advisor help you understand the complete corporate structure of the franchisor.

Explanation

This risk was not identified. The FDD discloses that the franchisor assumed franchise agreements from its parent company, which appears to be part of an internal corporate structuring. A predecessor history can be a risk if the current franchisor acquired a troubled system, potentially inheriting issues like litigation, franchisee dissatisfaction, or a failing brand. It is important to understand the full history of the system you are buying into.

Potential Mitigations

• Your attorney should carefully review the predecessor information in Items 1, 3, and 4 of any FDD.
• If a system was acquired from a predecessor, speaking with long-term franchisees who operated under the previous ownership provides valuable insight.
• A business advisor can help you research the public history and reputation of any predecessor entity.

Explanation

This risk was not identified. Item 3 discloses litigation from customers related to a data breach, but it does not show a pattern of litigation initiated by franchisees alleging fraud or by the franchisor against franchisees. A pattern of such lawsuits can be a major red flag, suggesting deep-seated problems in the franchise relationship, the business model's viability, or the franchisor's practices. Constant legal battles can drain a franchisor's resources and indicate an unhealthy system.

Potential Mitigations

• It is critical to have a franchise attorney thoroughly review the litigation history in Item 3 of any FDD.
• A business advisor can help you analyze the nature and frequency of lawsuits to identify any troubling patterns.
• If litigation is a concern, speaking with franchisees involved in those lawsuits can provide invaluable firsthand information.