Explanation

This risk was not identified in the FDD package. Rapid system growth can strain a franchisor's ability to provide adequate training, site selection assistance, and ongoing operational support to all franchisees. An overstretched support system can negatively impact the performance and satisfaction of new and existing franchisees alike.

Potential Mitigations

• Having a business advisor help you analyze growth projections against the franchisor's stated support staff and infrastructure is a useful exercise.
• In discussions with existing franchisees, it's wise to ask about their perception of the quality and timeliness of franchisor support.
• Your attorney can help you understand the specific support obligations committed to by the franchisor in the Franchise Agreement.

Explanation

This risk was not identified. Cousins has been in business since 1972 and has been franchising since 1979, indicating it is a mature and established system. An unproven system carries higher risks, as its business model, brand recognition, and support structures may not be fully developed or validated in the marketplace.

Potential Mitigations

• When evaluating any franchise, it is prudent to have a business advisor help assess the franchisor's history and track record in the industry.
• Speaking with the earliest franchisees of a system can provide valuable insight into its evolution and the stability of its model.
• An accountant's review of financial statements is crucial to determine if a new system has adequate capitalization to support its initial growth.

Explanation

This risk was not identified. The submarine sandwich restaurant industry is a well-established and long-standing segment of the food service market, not a recent trend. Investing in a fad business carries the risk that consumer interest will decline, potentially leaving you with a failing business and ongoing contractual obligations long after the trend has passed.

Potential Mitigations

• A business advisor can assist you in researching the long-term market trends for any industry you consider entering.
• It's wise to evaluate a company’s plans for product innovation and adaptation to stay relevant beyond current trends.
• A financial advisor can help assess a business model's resilience to economic shifts and changing consumer tastes.

Explanation

This risk was not identified in the FDD. Item 2 indicates that the management team has extensive and long-term experience with the Cousins brand and in the restaurant industry. Inexperienced leadership can be a significant risk, as it may lead to poor strategic decisions, underdeveloped operational systems, and inadequate support for franchisees.

Potential Mitigations

• Engaging a business advisor to help you vet the backgrounds of a franchisor's key executives is a crucial due diligence step.
• It is always recommended to speak with current franchisees about their confidence in the management team's leadership and strategic direction.
• Your attorney can help you understand the franchisor's contractual obligations for providing support, regardless of management's experience.

Explanation

This risk was not identified in the FDD package. Item 1 does not indicate that the franchisor is owned by a private equity firm. When a PE firm owns a franchisor, there can be a focus on short-term returns, which may lead to cost-cutting in franchisee support or pressure to increase fees, potentially at the expense of the system's long-term health.

Potential Mitigations

• If a franchisor is PE-owned, having a business advisor research the firm's history with other franchise brands is wise.
• It is beneficial to ask franchisees about any changes in culture, support, or costs since a PE acquisition.
• Your attorney should review any terms that allow the franchisor to be sold, to understand the potential impact of a future change in ownership.

Explanation

This risk was not identified. The FDD discloses the relationship between the franchisor, Cousins Subs Systems, Inc., and its affiliate, Cousins Submarines, Inc. Failing to disclose a parent company or provide its financial statements when required can hide financial weaknesses or control structures that pose a risk to the franchisee's investment.

Potential Mitigations

• Your attorney can help investigate a company's corporate structure to ensure all relevant parent and affiliate relationships are properly disclosed.
• If a parent company guarantees the franchisor's obligations, it's crucial for your accountant to review that parent's financial statements.
• Understanding the full corporate structure helps you assess where the ultimate responsibility for supporting your franchise lies; a business advisor can assist.

Explanation

This risk was not identified. The FDD does not indicate any negative history associated with predecessors that would suggest inherited problems for the current system. When a franchisor has predecessors, it is important to understand their history of litigation, bankruptcy, or franchisee relations, as unresolved issues can carry over to the new ownership.

Potential Mitigations

• A thorough review of FDD Items 1, 3, and 4 with your attorney is important to identify any risks associated with predecessor companies.
• When a predecessor exists, speaking with long-term franchisees who operated under the prior ownership can provide invaluable context.
• A business advisor can help you conduct independent research on a predecessor's public reputation and history.

Explanation

This risk was not identified, as Item 3 states that no litigation is required to be disclosed. A pattern of litigation, especially cases initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems. Similarly, a high volume of lawsuits filed by the franchisor against franchisees might suggest an overly aggressive or litigious culture.

Potential Mitigations

• Even with no disclosed litigation, it is wise to ask current and former franchisees about the nature of their relationship with the franchisor.
• A franchise attorney can sometimes perform independent searches for litigation that may not have met the technical threshold for FDD disclosure.
• Understanding the dispute resolution clauses in the Franchise Agreement with your attorney is crucial for assessing potential future conflicts.