Explanation

This risk was not identified in the FDD package. Cupbop Franchise, LLC (Cupbop LLC) began franchising in 2017 and has an operating history of several years with dozens of units. A new or unproven system can pose higher risks due to untested business models, minimal brand recognition, and a lack of established support structures, but that does not appear to be the case here.

Potential Mitigations

• When evaluating any franchise, it is beneficial to have a business advisor help you assess the franchisor's history and the maturity of its systems.
• Consulting with an attorney to understand any risks associated with a franchisor's operating history is a key part of due diligence.
• Your accountant can review the financial track record to gauge the stability and experience of the franchise company.

Explanation

This risk was not identified. The business concept is based on fast-casual Korean food, a sector of the restaurant industry with sustained consumer demand. The franchisor's parent company, Cupbop Co., has been operating since 2013, which suggests a level of market staying power beyond that of a temporary fad. Investing in a fad business carries the risk of sharp declines in customer interest after a trend subsides.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term consumer demand for any franchise concept's products or services.
• It is wise to ask existing franchisees about local market trends and the sustainability of customer demand.
• An accountant can help you model the financial risks associated with a business concept that might be tied to a short-term trend.

Explanation

This risk was not identified. The executives profiled in Item 2 have been with the Cupbop brand for many years, since its early stages. Additionally, the Vice President of Franchise has prior experience with another national franchise system. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions and inadequate support for franchisees, but the team here appears to have relevant experience.

Potential Mitigations

• Engaging a business advisor to help you vet the backgrounds and specific franchising experience of a franchisor's key management team is always recommended.
• Speaking with current franchisees is a great way to gauge their confidence in the management team's leadership and support.
• Your attorney can help you understand the implications if key, experienced managers were to leave the company.

Explanation

This risk was not identified, as the FDD discloses its parent companies in Item 1. However, a prospective franchisee should be aware that the financial stability of a parent company can be very important, especially when the parent guarantees the franchisor's obligations or, as in this case, acts as a primary supplier. Without the parent's financial statements, it can be difficult to fully assess the stability of the entire enterprise.

Potential Mitigations

• An experienced franchise attorney can help you determine if a parent company's financial statements should have been included under franchise disclosure rules.
• When a parent company is also a critical supplier, asking your accountant to assess the risks if that parent faces financial difficulty is important.
• Inquiring with the franchisor about the financial health of their parent company is a reasonable due diligence step.

Explanation

This risk was not identified. A predecessor is a company from which the franchisor acquired the business. Disclosures about predecessors in Items 1, 3, 4, and 20 are important because they can reveal a history of business failures, litigation, or other problems that might not be apparent from looking at the current franchisor alone. This FDD does not indicate any such predecessor history.

Potential Mitigations

• It is always a good practice to have your franchise attorney review Item 1 carefully for any mention of predecessors.
• If a predecessor is identified, a business advisor can help you research that company's public records and history.
• Asking long-term franchisees about their experience under any previous ownership can provide valuable context.

Explanation

This risk was not identified, as Item 3 states that there is no litigation that requires disclosure. A pattern of lawsuits filed by franchisees against a franchisor alleging fraud or misrepresentation, or a high number of lawsuits filed by the franchisor against franchisees, can be a major red flag about the health of the franchise relationship and the viability of the system.

Potential Mitigations

• A franchise attorney can help you interpret any litigation disclosed in Item 3 and may recommend further research into public court records.
• Even with no disclosed litigation, asking current and former franchisees about their experiences with disputes is a vital due diligence step.
• A business advisor can help you assess whether the nature of any disclosed litigation indicates broader systemic problems.