Explanation

The data provided in Item 20 for the predecessor's five licensed outlets does not indicate a high turnover rate, showing stability over the last three years. However, as this is a new franchise system under a new entity, there is no franchisee turnover history to evaluate. High turnover can be a red flag indicating systemic problems, such as a lack of profitability or poor franchisor support, which could jeopardize your investment.

Potential Mitigations

• Speaking with former licensees listed in the FDD with guidance from your business advisor can provide insight into their reasons for leaving.
• Your attorney can help you understand the differences between the prior license agreements and the new franchise agreement.
• An accountant should model different scenarios to assess the business's resilience to potential challenges.

Explanation

This risk was not identified, as the franchise system is new and has no history of rapid growth. Uncontrolled, rapid expansion in a franchise system can strain a franchisor's ability to provide adequate training, site selection assistance, and ongoing support. This can negatively impact franchisee performance and brand consistency. You should monitor future growth rates.

Potential Mitigations

• In discussions with the franchisor, your business advisor can help you probe their plans for scaling support systems in line with future growth.
• Your attorney should review the franchisor's contractual support obligations to ensure they are clearly defined.
• An accountant can analyze the franchisor's financial capacity to support any projected expansion.

Explanation

This risk was not identified. The country western-themed restaurant and bar concept is a well-established segment within the hospitality industry, not a new or fleeting trend. Investing in a fad business carries the risk that consumer interest could decline rapidly, potentially leading to business failure before you can achieve a return on your significant investment, leaving you with long-term contractual obligations.

Potential Mitigations

• A business advisor can help you research the long-term stability and consumer demand for this restaurant niche in your specific market.
• Understanding the brand's plans for menu innovation and concept evolution is important for long-term relevance.
• Your accountant can help you model the financial impact of potential shifts in consumer taste.

Explanation

This risk does not appear to be present, as the management team detailed in Item 2 has prior executive experience in the restaurant and franchise industries. Inexperienced management can pose a significant risk, as they may lack the expertise to develop robust systems, provide effective franchisee support, or make sound strategic decisions for the brand, which can negatively impact your potential for success.

Potential Mitigations

• Your business advisor can still assist you in researching the track record and reputation of the key executives mentioned in Item 2.
• When speaking with current licensees, asking specific questions about the quality and responsiveness of management support is beneficial.
• Your attorney can help verify that the management team has no undisclosed history of litigation or bankruptcy.

Explanation

The FDD does not disclose ownership by a private equity firm. This type of ownership can introduce risks, as PE firms often have a primary focus on short-term investor returns rather than the long-term health of franchisees. This can sometimes lead to increased fees, reduced support, or a quick sale of the franchise system, creating uncertainty for franchisees.

Potential Mitigations

• Your attorney can help you investigate the franchisor's ownership structure to confirm who the ultimate beneficial owners are.
• A business advisor can research the ownership group to understand their history and investment philosophy.
• Understanding the franchisor's assignment rights in the Franchise Agreement is critical, as a future sale to a PE firm is always possible.

Explanation

This risk was not identified, as Item 3 of the FDD states there is no litigation required to be disclosed. A pattern of litigation, especially franchisee-initiated lawsuits alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may indicate systemic problems with the franchisor's business practices, disclosure integrity, or relationship with its franchisees.

Potential Mitigations

• Your attorney can conduct independent searches for litigation involving the franchisor, its parent, or principals that may not have met the threshold for disclosure.
• Speaking with current and former franchisees or licensees can reveal past disputes that did not escalate to litigation.
• A business advisor can help assess if the absence of litigation is consistent with the company's age and size.