Explanation

This risk was not identified in the FDD package. Item 20 data for the last three years does not show a high rate of franchisee terminations, non-renewals, or other cessations. High turnover can be a major red flag, indicating potential issues with profitability, franchisor support, or franchisee satisfaction. Continuously monitoring these trends through new FDDs is a crucial part of ongoing due diligence for any franchisee.

Potential Mitigations

• It is wise to ask your business advisor to help you calculate annual turnover rates from Item 20 and compare them to industry averages.
• Engaging with a significant number of current and former franchisees can provide qualitative insight behind the numbers presented in the FDD.
• Your attorney can help you formulate questions for the franchisor regarding any outlets that have ceased operation for any reason.

Explanation

This risk was not identified. Item 20 data shows moderate and managed franchise growth in recent years, not the kind of explosive expansion that might strain a franchisor's support systems. Rapid growth can sometimes lead to a decline in the quality of training, site selection assistance, and ongoing operational support for franchisees. A stable growth pace is often a positive indicator for a franchise system.

Potential Mitigations

• A business advisor can help you analyze the franchisor's growth rate in Item 20 in conjunction with their financial statements in Item 21 to ensure they have the resources to support their expansion.
• Speaking with franchisees who opened at different times can provide a good perspective on whether support levels have remained consistent during growth.
• It is a good practice to ask your attorney to inquire about the franchisor's future development plans and how they intend to scale support.

Explanation

This risk was not identified. The FDD package indicates El Pollo Loco, Inc. (EPL) is a large, mature franchise system that has been operating and franchising for several decades. An unproven system carries higher risks, as its business model may not be time-tested, its brand recognition may be low, and its support infrastructure could be underdeveloped. Mature systems generally offer more stability and a more predictable operational framework.

Potential Mitigations

• Even with a mature system, it is important to have your accountant review the franchisor's recent financial performance in Item 21 to check for any signs of decline.
• A discussion with your business advisor can help you understand the brand's current market position and competitive landscape.
• Your attorney should still review the entire FDD package, as even mature systems can have unfavorable terms.

Explanation

This risk was not identified in the FDD package. The business model, which is centered on fire-grilled chicken, is a well-established concept within the quick-service restaurant industry and is not dependent on a short-term trend. A business based on a fad carries the risk that consumer interest will decline, potentially leaving you with a long-term contractual obligation for an unpopular concept.

Potential Mitigations

• It is always a good idea to have a business advisor help you research the long-term consumer demand for the franchise's core products or services in your specific market.
• Reviewing the franchisor's history of product innovation and adaptation in Item 11 can provide insight into their ability to evolve with market tastes.
• Your financial advisor can help assess the business model's resilience to economic shifts and changing consumer preferences.

Explanation

This risk was not identified in the FDD package. Item 2 discloses an executive team and board of directors with extensive prior experience at major national restaurant and franchise brands. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, inadequate franchisee support, and an underdeveloped operational system. A leadership team with deep industry and franchising experience is a positive indicator.

Potential Mitigations

• Even with an experienced team, it can be beneficial to research the recent performance of the specific brands listed in their Item 2 biographies with your business advisor.
• When speaking with current franchisees, asking about their direct experiences with the management team can offer valuable insights.
• An attorney can help investigate if there has been recent, significant turnover in key management positions that might signal instability.

Explanation

This risk was not identified. The FDD clearly discloses the parent company, El Pollo Loco Holdings, Inc. (EPLH), in Item 1. Furthermore, Item 21 provides the audited consolidated financial statements for EPLH, and a formal Guarantee of Performance from EPLH is included as Exhibit M. This level of transparency is compliant with disclosure rules and allows for a proper assessment of the financial strength backing the franchise.

Potential Mitigations

• An accountant should always confirm that if a parent company is mentioned in Item 1, its financial statements are either included in Item 21 or that their absence is properly justified.
• Your attorney should review the terms of any parent guarantee to ensure it is unconditional and covers all of the franchisor's obligations to you.
• If a franchisor is a subsidiary, it's prudent to have a business advisor assess the stability of the parent company.

Explanation

This risk was not identified in the FDD package. Item 1 states that the franchisor has no legal predecessors, and the corporate history, while involving several entities, is laid out. Failing to disclose or obscuring the history of a predecessor entity can hide past issues like high failure rates or litigation. A clear and transparent history allows for a more accurate assessment of the franchise system's background.

Potential Mitigations

• It's a valuable exercise for your attorney to review Item 1, 3, and 4 together to build a complete picture of the franchisor's corporate and legal history.
• A business advisor can help research any named predecessor entities online to look for news articles or other information that might not be in the FDD.
• Asking long-tenured franchisees about their experience under any previous ownership can provide important historical context.