Explanation

This risk was not identified in the FDD package. The data in Item 20 shows that the franchise system has been stable or shrinking slightly over the last three years, not growing rapidly. While this avoids the risks of overstretched support systems, it may also indicate a mature or saturated market for the brand. A lack of growth can limit future opportunities and brand momentum, which is an important factor for your business advisor to consider.

Potential Mitigations

• You should discuss the system's growth strategy and potential for market saturation with the franchisor and a business advisor.
• Investigating the competitive landscape in your desired area with a real estate professional is crucial to assess market potential.
• Ask current franchisees about their perspective on the brand's growth prospects and market position.

Explanation

This risk was not identified in the FDD package. FSI began franchising in 2015 and has a system of company-owned and franchised outlets that have been in operation for several years. This operating history suggests it is not a new or unproven franchise system. However, you should still evaluate the long-term viability and brand recognition in your specific market, as a decade of history does not guarantee future success in all locations.

Potential Mitigations

• A business advisor can help you analyze the brand's history and its competitive position within the broader quick-service restaurant industry.
• You should speak with long-standing franchisees to understand how the system has evolved and supported them over time.
• Your accountant should still review the multi-year financial data to assess the stability and maturity of the business model.

Explanation

The Fat Shack concept, focusing on indulgent "Fat Sandwiches" and late-night service near college campuses, has been operating for over a decade, suggesting it is not a short-lived fad. However, this niche focus and reliance on a specific demographic could present risks if consumer tastes shift towards healthier options or if your location is not heavily dependent on a college population. The business model has proven durable but may have a narrower appeal than broader fast-food concepts.

Potential Mitigations

• A business advisor can help you perform a thorough market analysis to confirm that the concept's niche appeal is a strong and sustainable fit for your specific area.
• Discuss FSI's strategy for product innovation and adaptation to evolving consumer health trends with management.
• When developing financial projections, your accountant should consider the potential for seasonal business fluctuations, especially if you are near a college.

Explanation

This risk was not identified in the FDD package. Item 2 indicates that the key executives, Thomas Armenti and Kevin Gabauer, have been with the company since its inception and have over a decade of experience operating this specific business concept. This long tenure suggests they possess significant operational and industry-specific expertise. You should still verify the quality of support with current franchisees, as experience does not always translate to effective franchisee support.

Potential Mitigations

• Engaging with a business advisor can help you assess the management team's strategic vision for the brand's future.
• You should speak with a range of franchisees to gauge their opinion on the management team's effectiveness and responsiveness.
• Asking the franchisor direct questions about their support team's structure and experience is a reasonable due diligence step.

Explanation

This risk was not identified in the FDD package. Item 1 indicates that Fat Shack Inc. does not have a parent company. This means the franchisor's strategic decisions are likely driven by its own management team rather than an outside investment firm's objectives. This can lead to more stability and a focus on long-term brand health, but it also means the franchisor must stand on its own financially without the backing of a larger parent entity.

Potential Mitigations

• Your accountant should carefully analyze the stand-alone financial statements in Item 21 to ensure the company is well-capitalized.
• A business advisor can help you understand the implications of being part of an independent system versus one owned by a larger entity.
• You should ask the franchisor about their long-term plans and commitment to the brand.

Explanation

This risk was not identified in the FDD package. Item 1 clearly states that FSI has no parent company. The disclosures appear to properly identify the franchising entity and its affiliates. Therefore, the risk of a hidden, financially unstable parent company influencing the system is not present here. Your analysis should focus on the disclosed financial health of Fat Shack Inc. itself.

Potential Mitigations

• Your attorney can confirm the corporate structure and ensure all relevant affiliated entities are properly disclosed.
• Your accountant should review the affiliate transactions detailed in the financial statement footnotes for any potential risks.
• Always ensure that the entity you are contracting with is the same entity disclosed as the franchisor throughout the FDD.

Explanation

This risk was not identified in the FDD package. Item 1 describes a 2019 conversion from an LLC to a corporation, which is a change in legal structure rather than the acquisition of a different business. No other predecessor entities are disclosed. This means the operational and financial history presented in the FDD pertains directly to the current management and system, providing a clearer historical picture than if the system had been recently acquired from a different company.

Potential Mitigations

• A review of the company's history with your business advisor can confirm the continuity of management and operations.
• Your attorney should verify that the corporate conversion was handled properly and does not create any lingering liabilities.
• You can ask long-term franchisees about their experience before and after the 2019 corporate conversion.

Explanation

This risk was not identified in the FDD package. Item 3 states that there is no litigation that requires disclosure. This suggests the franchisor has not been recently involved in significant legal disputes with franchisees, regulators, or other parties concerning fraud, contract violations, or franchise law. While positive, this does not eliminate the possibility of future disputes, so the terms of the Franchise Agreement regarding dispute resolution remain very important.

Potential Mitigations

• Your attorney should still perform an independent public records search to confirm the absence of significant litigation.
• It is still crucial to consult with your attorney to understand the dispute resolution clauses in the Franchise Agreement.
• You should ask former franchisees about any disputes they may have had, even if they did not result in litigation.