Explanation

This specific risk was not identified in the FDD package, as Item 20 shows no franchisee terminations, non-renewals, or other cessations. This is expected for a very new system. Generally, high turnover can be a major red flag indicating potential problems with profitability, franchisor support, or the overall business model, which can negatively impact your own chances of success.

Potential Mitigations

• A discussion with your business advisor about the risks of joining a new system with a limited track record is essential.
• It is important to ask current franchisees about their satisfaction and future intentions, with guidance from your attorney.
• An accountant can help you model different scenarios given the lack of historical franchisee performance data.

Explanation

This risk was not identified, as Item 20 data indicates the system is growing slowly, not rapidly. While this avoids the risks of strained support systems from over-expansion, it can also suggest challenges in attracting new franchisees. Rapid growth in other systems can sometimes stretch a franchisor's resources, leading to inadequate support for franchisees despite their royalty payments.

Potential Mitigations

• A business advisor can help you interpret the implications of slow system growth for brand recognition and long-term value.
• It is advisable to question the franchisor about their growth strategy and the resources allocated to support it.
• Consulting with an accountant can help you assess the financial stability of a slowly growing system.

Explanation

This risk was not identified, as Item 1 does not indicate that the franchisor is owned by a private equity firm. This type of ownership can sometimes lead to a focus on short-term profits over the long-term health of the franchise system. Decision-making may prioritize investor returns, which can potentially lead to increased fees, reduced support, or a quick sale of the company.

Potential Mitigations

• It is always a good practice to ask your attorney to verify the franchisor's ownership structure and any recent changes.
• A business advisor can help you research the reputation of any parent company or major investors involved.
• Understanding who controls the franchise system is a key piece of due diligence that your attorney can help you investigate.

Explanation

This risk was not identified, as the FDD does not indicate the existence of a parent company whose financials would be material to your investment decision. In some cases, a franchisor might be a subsidiary of a larger entity. If the parent's financial health is crucial for supporting the franchisor, its financial statements should also be disclosed to provide a complete picture of the system's stability.

Potential Mitigations

• Your attorney can help you confirm the franchisor's corporate structure to ensure there are no undisclosed parent companies.
• If a parent company exists and guarantees the franchisor's performance, an accountant should review its financial statements.
• Seeking clarity from the franchisor about its relationship with any affiliated companies is a reasonable due diligence step.

Explanation

This risk was not identified in the FDD, as Item 1 does not disclose any predecessor entities. A predecessor is a company from which the franchisor acquired a major part of its assets. When a predecessor exists, it is important to review their history for any issues like litigation, bankruptcy, or high franchisee turnover, as these could reflect on the health of the system you are buying into.

Potential Mitigations

• Your attorney can help you investigate the history of the brand and its founders to uncover any relevant business history.
• A business advisor can assist with online research to see if the system operated under a different name or structure previously.
• Asking the franchisor directly about the origin of their operating system is a valuable part of due diligence.

Explanation

This risk was not identified in the document, as Item 3 discloses no litigation. A pattern of lawsuits filed by franchisees against the franchisor alleging fraud, misrepresentation, or breach of contract can be a significant warning. It may suggest systemic problems in the franchisor's sales process, support obligations, or general business practices. Conversely, a high number of suits filed by the franchisor against franchisees could indicate an overly aggressive culture.

Potential Mitigations

• It is wise to have your attorney conduct an independent search for litigation involving the franchisor or its principals.
• Asking current and former franchisees about any disputes they are aware of can provide valuable insight.
• A business advisor can help you research online forums and news articles for any reports of legal troubles.