Explanation

This risk was not identified, as Eiffel Waffle Enterprise LLC (Eiffel Waffle) only recently began offering franchises and has no history of franchisee turnover, according to Item 20. In general, high turnover can signal systemic problems, such as a lack of profitability or poor franchisor support. Monitoring these figures in future FDDs would be important if you were to invest.

Potential Mitigations

• In the absence of historical data, speaking with the single franchisee who has signed an agreement (listed in Exhibit F) can provide early insights.
• Your business advisor can help you assess the potential for future turnover based on the franchisor's business model and support structure.
• It is important for your attorney to review the termination and renewal clauses in the franchise agreement to understand your future rights.

Explanation

This risk was not identified, as Eiffel Waffle is new and has not yet experienced a period of rapid growth. It is important to consider that rapid expansion in the future could strain a new franchisor's ability to provide adequate support. The system has six affiliate-owned stores, providing some operational experience.

Potential Mitigations

• Inquiring with the franchisor about their plans and capacity for scaling support infrastructure to match projected growth is a prudent step.
• A business advisor can help you evaluate the franchise's growth strategy and its potential impact on franchisee support.
• Your accountant should review the franchisor's financials to assess if they have the resources to support future growth.

Explanation

This risk was not identified, as the FDD does not indicate that the franchisor is owned by a private equity firm. Generally, private equity ownership can introduce a focus on short-term investor returns, which may not always align with the long-term health of the franchise system and individual franchisee profitability.

Potential Mitigations

• Confirming the ownership structure and any plans for future sale of the company is a reasonable due diligence step to take with your attorney.
• Understanding the franchisor's long-term vision for the brand can be assessed by speaking directly with the founders.
• A business advisor can help you analyze the potential impact of any future ownership change on the franchise system.

Explanation

This specific risk was not identified, as Item 1 of the FDD clearly states that the franchisor does not have a parent company. It is important for a franchisor to disclose parent companies, as their financial health and influence can be material to a franchisee's investment, especially if the franchisor entity itself is newly formed or thinly capitalized.

Potential Mitigations

• Your attorney can help verify the franchisor's corporate structure and confirm the absence of an undisclosed parent entity.
• Your accountant should analyze the financial statements of the disclosed franchisor and its affiliates to assess the overall financial picture.
• Understanding the role and financial stability of the disclosed affiliates is crucial, and a topic for discussion with your financial advisor.

Explanation

This risk was not identified because the FDD states there is no predecessor company. In cases where a franchisor acquires a business from a predecessor, it is crucial to review the predecessor's history for any signs of trouble, such as litigation or high franchisee turnover, as these issues could be inherited by the new franchisor.

Potential Mitigations

• Although no predecessor is listed, asking the franchisor about the history of the affiliate-owned stores since 2021 can provide some historical context.
• Your attorney can help confirm that there is no undisclosed predecessor entity that should have been reported.
• A business advisor can assist in researching the public reputation of the affiliate-owned locations.

Explanation

No litigation was required to be disclosed in Item 3 of the FDD. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems. The absence of such litigation is a positive sign, although expected for a brand-new franchise system.

Potential Mitigations

• Your attorney can conduct an independent public records search to verify that no material litigation exists.
• Discussing any informal disputes with the single franchisee who has signed an agreement could provide some insight.
• Understanding the dispute resolution clauses in the Franchise Agreement with your attorney is important for any future issues.