Explanation

This risk was not identified in the FDD package. A new or unproven franchise system can present higher risks due to undeveloped support systems, minimal brand recognition, and a lack of a performance track record. It is crucial to evaluate the franchisor's experience and the business model's viability before investing in an emerging brand.

Potential Mitigations

• A thorough due diligence of the founders' and management's experience in both the industry and franchising should be conducted with your business advisor.
• Speaking to the earliest franchisees about their experiences is a key step in assessing the franchisor’s capabilities and support.
• Your accountant can help assess if the franchisor is adequately capitalized to support its initial growth phase.

Explanation

This risk was not prominently identified. The executive team described in Item 2 appears to have relevant experience, including a CEO present since inception and a President with prior franchise operations experience. However, an inexperienced management team can be a significant risk, potentially leading to poor strategic decisions, inadequate franchisee support, and a higher chance of system-wide problems. It is a critical area for due diligence.

Potential Mitigations

• A business advisor can help you thoroughly vet the backgrounds of the entire management team, focusing on experience in both this industry and franchise system management.
• It is always wise to speak with a range of existing franchisees about their direct experiences with the management team's competence and support.
• Your attorney can help you inquire about the roles and responsibilities of each executive to ensure all key business areas are covered by experienced leadership.

Explanation

The FDD does not indicate that the franchisor, Smash Brothers, LLC (Crushr LLC), is owned by a private equity firm. This type of ownership can sometimes lead to a focus on short-term returns over the long-term health of the franchise system, potentially affecting franchisee support and costs. Since this is not the case here, the risk is not present.

Potential Mitigations

• Researching the ownership structure of any franchisor is a standard part of due diligence a business advisor can assist with.
• Discussing any ownership changes with existing franchisees can provide insight into the franchisor's culture and priorities.
• Your attorney can review the franchise agreement for clauses related to the sale or transfer of the franchise system.

Explanation

This risk was not identified. FDD Item 1 clearly discloses several affiliated companies, including Crushr IP, LLC, which owns the intellectual property. The franchisor's financial statements are provided and audited. In some cases, a franchisor might be a thinly capitalized subsidiary, making the parent company's financial health critical. Failure to disclose a parent or provide its financials when required can obscure the true financial backing of the system.

Potential Mitigations

• Your attorney can help verify the corporate structure if there's any ambiguity about a controlling parent entity.
• If a parent company provides a guarantee for the franchisor's obligations, your accountant should ensure the parent's financial statements are provided and reviewed.
• Understanding the relationships and dependencies between the franchisor and its affiliates is a key task for your accountant and attorney.

Explanation

This risk was not identified. Item 1 mentions a prior business name, 'Smash-It,' but does not disclose any formal predecessors from which it acquired substantial assets. A predecessor's history of litigation, bankruptcy, or high franchisee failure rates can be a red flag, indicating potential inherited problems for the current system. Complete disclosure of such history is required for proper due diligence.

Potential Mitigations

• Your attorney should always carefully review any predecessor information disclosed in Items 1, 3, and 4 of an FDD.
• Independent research on a predecessor's track record, assisted by a business advisor, can uncover historical issues.
• When predecessors exist, asking long-term franchisees about their experience under prior ownership provides valuable context.

Explanation

This risk was not identified. Item 3 states, 'No litigation is required to be disclosed in this Item.' A pattern of lawsuits, particularly those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag indicating systemic problems. Likewise, a high volume of franchisor-initiated litigation against franchisees may suggest an overly aggressive or unsupportive culture.

Potential Mitigations

• An attorney should always carefully review the details of any disclosed litigation in Item 3 for its nature, frequency, and outcomes.
• Independent legal research, with an attorney's help, can sometimes provide additional context on disclosed cases.
• Treating any pattern of fraud claims as a major warning sign is a prudent step your attorney would advise.