Explanation

This risk was not identified in the FDD Package, as Item 20 confirms there are currently no franchised outlets. Therefore, there is no history of franchisee turnover. High franchisee turnover is generally a significant red flag, as it may indicate systemic problems such as a lack of profitability, poor franchisor support, or an unsustainable business model. Careful analysis of these trends is crucial when evaluating an established franchise system.

Potential Mitigations

• If considering an established system, it is vital to have an accountant calculate the effective turnover rate from Item 20 data over several years.
• A key part of due diligence involves contacting former franchisees listed in Item 20 to understand their reasons for leaving, a process your attorney can help guide.
• Engaging a business advisor to compare the system's turnover rate against industry averages can provide valuable context.

Explanation

This risk is not present, as Item 20 shows the franchisor has not yet sold any franchises and therefore has no history of rapid franchise growth. Rapid growth in a franchise system can sometimes strain a franchisor's ability to provide adequate support, training, and quality control to all units. Prospective franchisees should typically evaluate if a franchisor's support infrastructure is scaling appropriately with its unit growth.

Potential Mitigations

• In any franchise review, it's wise to ask existing franchisees about the quality and timeliness of the support they receive from the franchisor.
• Your accountant can help assess if a rapidly growing franchisor's financials show sufficient reinvestment into support infrastructure.
• A business advisor can assist in evaluating the franchisor's staffing levels and experience in managing a growing network.

Explanation

This risk was not identified in the FDD Package. The franchisor does not appear to be owned or controlled by a private equity firm. When a franchisor is owned by a private equity fund, there can be a risk that management decisions prioritize short-term returns for investors over the long-term health of the franchise system and the profitability of individual franchisees. This can manifest in reduced support, increased fees, or a quick sale of the brand.

Potential Mitigations

• When evaluating a PE-owned franchisor, it is crucial to have a business advisor help you research the firm's history with other franchise brands.
• It is important to understand the typical investment timeline of the private equity firm, as this can indicate when a sale of the system might occur.
• Your attorney should carefully review the assignment clauses in the Franchise Agreement to understand your rights if the system is sold.

Explanation

This risk was not identified in the FDD Package. Item 1 appears to properly disclose the franchisor's affiliate structure. A failure to disclose a parent company can be a significant issue, as it may obscure the ultimate source of control and financial stability for the franchise system. Franchisees should be able to assess the health of the entire enterprise, especially if a thinly capitalized subsidiary is acting as the franchisor.

Potential Mitigations

• If a franchisor is a subsidiary, your attorney should ensure that the parent company's financials are provided if they guarantee the franchisor's performance.
• An accountant can help analyze the financial relationship between a franchisor and its parent to assess its stability.
• It's wise to have your business advisor investigate the reputation and track record of any parent company.

Explanation

This risk was not identified, as Item 1 explicitly states that the franchisor has no predecessors. A predecessor is a company from which the franchisor acquired the major portion of its assets. A franchisor's failure to disclose a predecessor could conceal important historical information, such as past bankruptcies, litigation, or high franchisee turnover rates, which would be material to a prospective franchisee's decision.

Potential Mitigations

• Your attorney should always verify whether a new franchise system is truly new or a rebranding of a prior, potentially failed, system.
• When a predecessor is disclosed, it's important to conduct due diligence on that entity's history with the help of your business advisor.
• Investigating the business history of the franchisor's key executives, with help from a business advisor, can sometimes uncover connections to prior systems.

Explanation

This risk was not identified in the FDD Package, as Item 3 discloses no litigation. A pattern of litigation, especially lawsuits initiated by franchisees alleging fraud, misrepresentation, or breach of contract, is a major red flag. Similarly, a high number of lawsuits initiated by the franchisor against its franchisees for royalty collection or other defaults can suggest an overly aggressive or litigious culture, or a system where franchisees are struggling financially.

Potential Mitigations

• Your attorney should always carefully review the nature, frequency, and outcomes of any lawsuits disclosed in Item 3.
• If litigation is disclosed, a business advisor can help assess whether the number of suits is unusual for a system of its size and age.
• It is wise to ask current and former franchisees about any disclosed litigation to get their perspective on the matter.