Explanation

This risk was not identified in the FDD. The Item 20 data does not show any franchisee terminations, non-renewals, or other cessations, as Cho Dang only began franchising in 2024. Analyzing franchisee turnover is a critical way to evaluate system health, as high rates can signal problems like low profitability or poor support. The absence of this historical data is itself a risk associated with a new system.

Potential Mitigations

• Speaking with the initial group of franchisees listed in Exhibit E can provide early insight into their satisfaction levels.
• Your attorney should explain the termination and renewal clauses in the Franchise Agreement, as these will influence future turnover.
• A business advisor can help you monitor the system's growth and future turnover rates as they become available.

Explanation

Cho Dang is a new franchisor planning to add several locations in the next year. While the absolute number is not large, this expansion comes from a zero-franchisee base and occurs while the company is not yet profitable. Such growth, even if modest, could potentially strain the franchisor's limited financial and personnel resources, possibly affecting its ability to provide adequate training and support to all new locations as the system scales.

Potential Mitigations

• Question the franchisor directly about their specific plans and resources for scaling their support infrastructure to match unit growth.
• Your business advisor should help you evaluate the adequacy of the franchisor's support staff relative to its growth plans.
• It is important to discuss the quality and timeliness of support being received with the system's very first franchisees.

Explanation

This risk was not identified. The business concept centers on traditional Korean cuisine, particularly soft tofu soup (soon-doobu), which is a well-established food category with a long history of consumer demand. The long-term viability of a franchise often depends on a sustainable business model rather than a temporary fad, making this established concept a potentially positive factor for longevity.

Potential Mitigations

• A business advisor can help you analyze the long-term consumer demand for this specific type of restaurant in your local market.
• It is wise to have your attorney review the franchisor's plans for menu innovation and adaptation as described in Item 11.
• Researching local competition and market saturation for similar Korean restaurant concepts is a prudent step to undertake.

Explanation

This risk was not identified. Item 2 and Item 11 indicate that the franchisor's key executives have several years of direct, hands-on experience operating affiliate-owned restaurants of the same type and brand. The CEO is noted as having over 12 years of relevant experience. This practical operational background within the brand is a significant positive factor, suggesting management understands the business model's challenges from a franchisee's perspective.

Potential Mitigations

• It is still valuable to discuss the management team's specific franchising support experience with existing franchisees.
• Your attorney can help you frame questions to the franchisor about how their operational experience will translate into effective franchisee support.
• A business advisor can assist in researching the track record and reputation of the affiliate companies mentioned in Item 2.

Explanation

This risk does not appear to be present. Item 1 and the notes to the financial statements indicate Cho Dang is owned by individuals active in management, not by a private equity firm. This is an important distinction, as PE ownership can sometimes introduce a focus on short-term returns, such as aggressive fee increases or cuts in support, which may not align with the long-term health of franchisees.

Potential Mitigations

• Confirming the ownership structure and any plans for a future sale of the company is a good discussion point to have with your attorney.
• A business advisor can help research the backgrounds of the individual owners and their related companies.
• Your attorney should review the assignment clause in the Franchise Agreement to understand your rights if the system is sold in the future.

Explanation

This risk was not identified. Item 1 appears to disclose the franchisor entity and its key affiliates. There is no indication of a controlling parent company whose financials would be material to your investment decision but have been omitted. This level of transparency is important for you to understand the complete corporate structure and chain of command.

Potential Mitigations

• It is always wise for your attorney to verify the corporate structure and ensure all relevant controlling entities have been disclosed.
• If any affiliate provides a financial guarantee, your accountant should confirm their financial statements are included, if required by law.
• Your business advisor can help you understand the roles of the various affiliated companies mentioned in the FDD.

Explanation

This risk was not identified, as Item 1 does not disclose any legal predecessors. The franchise system appears to be newly developed by the current franchisor entity rather than being acquired from a prior company. Reviewing a predecessor's history is important because it can reveal inherited problems, such as litigation or high franchisee failure rates. In this case, the risks are those associated with a new venture, not an established one with a hidden past.

Potential Mitigations

• Your attorney should confirm that the franchisor has no legal predecessors that should have been disclosed.
• A business advisor can help you investigate the operational history of the affiliate-owned restaurants to gauge the system's performance before it began franchising.
• Speaking with the franchisor about the evolution from their affiliate-owned stores to a franchise model can provide valuable context.

Explanation

This risk was not identified. Item 3 of the FDD states that there is no material litigation required to be disclosed. A clean litigation history is a positive indicator. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can signal serious, systemic problems with a franchisor's operations or sales practices.

Potential Mitigations

• It is a good practice to have your attorney conduct an independent public records search for any litigation that may not have been disclosed.
• Discussing any past informal disputes or disagreements with current and former franchisees can provide insights beyond formal litigation.
• Understanding the dispute resolution process outlined in the Franchise Agreement is crucial should any future conflicts arise; your attorney can explain this.