Explanation

The FDD discloses a relatively low rate of franchisee terminations, non-renewals, and other cessations. In the most recent year, 12 units out of a starting base of 952 ceased operations for these reasons, a turnover rate of approximately 1.3%. While this is not high, the document also shows 62 transfers in the same year. A high number of transfers can sometimes be a masked indicator of franchisee distress, which warrants further investigation.

Potential Mitigations

• Speaking with a significant number of current and former franchisees from the list in Item 20 is crucial to understand their satisfaction and reasons for leaving.
• Involving your attorney can help you frame questions to former franchisees about whether their exit was a planned sale or a result of operational difficulties.
• Your business advisor can help you assess the context behind the franchisee transfers to determine if it signals a potential risk.

Explanation

This risk was not identified in the FDD Package. Cold Stone Creamery is a large, mature franchise system that has been operating for many years. An unproven system presents higher risks because its business model, brand recognition, and support structures are not yet well-established. Franchisees in such systems face greater uncertainty regarding long-term viability and profitability.

Potential Mitigations

• When evaluating any franchise, a business advisor can help you research the franchisor's history and the system's track record of success.
• Your accountant should always carefully review the financial statements of any franchisor, paying special attention to its operating history.
• It is beneficial to consult with your attorney to understand the risks associated with investing in a new versus a mature franchise system.

Explanation

This risk was not identified in the FDD Package. Ice cream is a staple consumer product with a long history of sustained demand. A fad business is one based on a short-lived trend, which creates a high risk of failure once public interest wanes. Franchisees in such businesses may find themselves locked into a long-term agreement for a concept that is no longer viable.

Potential Mitigations

• A business advisor can help you research the long-term market demand and competitive landscape for any product or service.
• When evaluating an opportunity, it is important to consider its resilience to changing consumer trends and economic conditions with your financial advisor.
• Consulting your attorney on the length and exit conditions of the franchise agreement is critical, especially for trend-based businesses.

Explanation

This risk was not identified in the FDD Package. Item 2 shows that the key personnel at Kahala Franchising, L.L.C. (Kahala) and its parent companies have extensive experience in the franchise industry and with the Cold Stone Creamery brand specifically. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, inadequate franchisee support, and an unrefined operating system.

Potential Mitigations

• Before investing, you should always research the background of the franchisor's key executives with the help of a business advisor.
• Contacting current franchisees to inquire about their direct experiences with the management team can provide valuable insight.
• Your attorney can help you understand what recourse, if any, you have if franchisor management changes significantly after you sign the agreement.

Explanation

This risk was not identified in the FDD Package. The franchisor, Kahala, is a subsidiary of MTY Franchising USA, Inc., which is disclosed as the Guarantor and whose audited financial statements are included in the FDD. Failing to disclose a parent company or provide its financial statements when required can obscure the true financial health and stability of the entity ultimately backing the franchise system.

Potential Mitigations

• An experienced franchise attorney can help determine if a parent company's financial disclosure is required based on the franchisor's structure.
• Your accountant should always review the franchisor's financial statements for any notes regarding parent guarantees or dependencies.
• A thorough review of Item 1 with your business advisor is important to understand the complete corporate structure.