Explanation

This risk was not identified in the FDD package. Item 20 and Exhibit F show that the system is new to franchising and no franchisees have left the system to date. High franchisee turnover is a critical red flag in established systems, as it can indicate franchisee dissatisfaction, lack of profitability, or poor franchisor support. Continual monitoring of these figures in future FDDs would be prudent.

Potential Mitigations

• Before investing in any franchise, engaging a business advisor to analyze franchisee turnover rates from Item 20 over a three-year period is crucial.
• Your attorney can help you formulate questions for former franchisees to understand why they left the system.
• An accountant can help assess whether turnover is related to unit profitability issues.

Explanation

This risk was not identified. Item 20 data indicates the system is in its infancy, with only two franchised outlets opened in the most recent year. Rapid growth can strain a franchisor's ability to provide adequate support, training, and quality control. While not a current issue, this is a factor to monitor in future FDDs if you consider joining the system.

Potential Mitigations

• A business advisor can help you evaluate a franchisor’s infrastructure to determine if it can support its planned growth.
• Reviewing a franchisor’s financial statements with an accountant can reveal if they are reinvesting in support systems.
• Your attorney should review the support obligations outlined in the franchise agreement.

Explanation

This risk was not identified in the FDD. The franchise operates in the Mexican and Latin food sector, a well-established and mainstream segment of the restaurant industry in the United States. While individual restaurants can fail, the underlying business concept is not based on a short-term trend or fad, which reduces the risk of the entire market disappearing.

Potential Mitigations

• A business advisor can help you research the long-term consumer demand and market trends for any franchise industry you consider.
• Assessing a brand’s plans for innovation and adaptation with your marketing advisor is important for any business.
• Your accountant can help model the business's resilience to economic shifts.

Explanation

This risk was not identified in the FDD. Item 1 indicates the franchisor is part of a corporate structure founded by the operational management team. There is no disclosure of ownership or control by a private equity firm. Therefore, the specific risks associated with PE ownership, such as a focus on short-term returns over long-term brand health, do not appear to be present here.

Potential Mitigations

• Your attorney can help you verify the ownership structure of any franchisor by reviewing corporate records.
• A business advisor can help you research the track record of any private equity firm involved with a franchise system.
• Speaking with franchisees about any changes since a private equity acquisition is a key due diligence step.

Explanation

This risk was not identified in the FDD, as the parent company is disclosed in Item 1. However, while District Franchising is a new entity with losses, the financials for its more established parent, District Brands, Inc., are not provided. Given that certain parent overhead costs are not allocated to the franchisor entity, the parent's financial health is material to understanding the system's true stability, and its absence could be seen as a disclosure weakness.

Potential Mitigations

• Your accountant should evaluate the franchisor's financials in light of the missing parent company data and unallocated expenses.
• It is advisable for your attorney to request the parent company's financial statements for a complete risk assessment.
• Understanding any financial guarantees provided by the parent to the franchisor entity is a crucial task for your attorney.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD clearly states, "We have no predecessors." Therefore, there is no risk of undisclosed negative history from prior entities that operated the brand. Your due diligence will focus entirely on the current franchisor and its affiliate structure as disclosed.

Potential Mitigations

• Your attorney should always verify statements about predecessors in Item 1.
• If a predecessor is identified, a business advisor can help you research their history and reputation.
• Interviewing franchisees who operated under a predecessor provides valuable historical context.

Explanation

This risk was not identified in the provided FDD package. Item 3 states that no litigation is required to be disclosed. The absence of litigation, especially claims of fraud or misrepresentation from other franchisees, is a positive sign for a new franchise system. However, this should be monitored in future FDDs as the system grows.

Potential Mitigations

• Your attorney should always carefully review the nature, volume, and outcomes of any litigation disclosed in Item 3.
• Conducting independent searches for litigation against the franchisor can sometimes reveal disputes not yet disclosed; a business advisor can assist.
• It is wise to treat a pattern of franchisor-initiated lawsuits against franchisees as a potential red flag and discuss it with your attorney.