Explanation

The franchisor's audited financial statements do not indicate financial instability. For the fiscal year ending December 29, 2024, Cajun Global LLC (Cajun) reported positive and growing net income ($31.5 million), increasing revenue, and a healthy balance sheet with positive member's equity ($168.2 million). There are no signs of financial distress that would suggest an inability to support the franchise system. Financial stability is crucial for ensuring the franchisor can provide promised support.

Potential Mitigations

• An experienced franchise accountant should review the franchisor's financial statements, including all footnotes and historical trends, to confirm financial health.
• It is wise to discuss the franchisor’s financial performance and its capacity to support new and existing franchisees with your business advisor.
• Your attorney can help verify if the franchisor is required by any state to maintain financial assurances like a bond or escrow account.

Explanation

The data in Item 20 of the FDD shows that the franchise system has been shrinking over the past three years, not experiencing rapid growth. While slow growth or shrinkage presents its own risks, the specific challenges associated with a franchisor's support systems being outpaced by rapid expansion were not identified. A franchisor growing too quickly may struggle to provide adequate training, site selection assistance, and ongoing operational support to its new franchisees.

Potential Mitigations

• Your business advisor can help you evaluate whether the franchisor's current size and growth rate align with your investment goals.
• Consulting with existing franchisees about the quality and timeliness of franchisor support can provide insight into the franchisor's operational capacity.
• It is prudent to have an accountant review the franchisor’s financial statements to assess if they have sufficient resources to support their existing system.

Explanation

This risk was not identified, as the FDD indicates Church's is a long-established brand, with predecessors starting to franchise in 1964. An unproven system carries higher risks, as it may lack a track record of success, refined operational procedures, or established brand recognition. Franchisees in new systems may face more uncertainty regarding the long-term viability and profitability of the business model, making thorough due diligence even more critical.

Potential Mitigations

• You should review Item 1 and Item 20 of the FDD with your business advisor to understand the full history and maturity of the franchise system.
• Having an attorney review the franchisor’s history of litigation and bankruptcy in Items 3 and 4 can provide additional insight into its stability.
• Speaking with long-term franchisees can offer a historical perspective on the system's evolution and performance.

Explanation

The franchise offers quick-service restaurants specializing in fried chicken, a well-established and long-standing segment of the restaurant industry, rather than a business based on a recent trend. A fad business carries the risk that consumer interest could decline rapidly, potentially leaving you with a non-viable business and a long-term contractual obligation to the franchisor. Evaluating the long-term consumer demand for a product or service is a key part of due diligence.

Potential Mitigations

• A business advisor can help you research the stability and long-term trends of the quick-service restaurant industry in your target market.
• It is wise to assess the brand's history and market presence to gauge its staying power beyond short-term trends.
• Analyzing the franchisor's plans for innovation and menu development in Item 11 can provide insight into its strategy for long-term relevance.

Explanation

This risk was not identified, as the executive team detailed in Item 2 of the FDD appears to have extensive experience in the restaurant and franchise industries at major companies. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, inadequate franchisee support, and underdeveloped operational systems. Assessing the background of the franchisor's key personnel is an important step in evaluating the potential for success.

Potential Mitigations

• Your business advisor should help you review the backgrounds of the key executives listed in Item 2 of the FDD.
• It's beneficial to ask current franchisees about their direct experiences and the quality of support they receive from the management team.
• An attorney can help investigate if there have been any recent, undisclosed turnovers in key management positions that might signal instability.

Explanation

This risk was not identified. The FDD provides a detailed ownership structure in Item 1, tracing it to the ultimate parent company. It is a risk when a franchisor is a thinly capitalized subsidiary and fails to disclose its parent company's financials, as this can obscure the true financial backing of the system. Ensuring you have a complete financial picture is a crucial part of due diligence that your accountant can assist with.

Potential Mitigations

• Your accountant should always verify that the financial statements provided in Item 21 are for the correct franchising entity.
• If a parent company guarantees the franchisor's performance, an attorney should confirm that the parent's financial statements are included in the FDD package.
• It is wise to ask the franchisor to clarify the roles and responsibilities of all parent and affiliate companies mentioned in Item 1.

Explanation

This risk was not identified, as the FDD appears to disclose the franchisor's predecessor and affiliated companies as required. Inadequate disclosure of a predecessor's history could hide a track record of business failures, litigation, or other issues that might be relevant to your decision. A complete understanding of the system's history is necessary for a full risk assessment, which your attorney can help you evaluate.

Potential Mitigations

• Always have your attorney review the disclosures in Items 1, 3, and 4 for any information related to predecessor companies.
• Your business advisor can assist in researching the history and reputation of any predecessor entities mentioned.
• Inquiring with long-standing franchisees about their experience under previous ownership can provide valuable context.