Explanation

The audited financial statements for Fox's Pizza Den, Inc. (Fox's Pizza Den) show consistent profitability and positive, growing retained earnings over the past three fiscal years. The company does not appear to have significant debt issues or negative net worth. While the company appears financially stable on paper, this should be considered alongside other operational risks, such as franchisee turnover.

Potential Mitigations

• An experienced franchise accountant should perform a thorough review of the franchisor's financials, including all footnotes and year-over-year trends.
• Discuss the franchisor's financial health and its ability to support franchisees with your financial advisor.
• Ask your accountant to assess the balance between revenues from ongoing royalties versus one-time franchise fees for system sustainability.

Explanation

The FDD does not indicate a period of excessively rapid growth. Instead, Item 20 data shows the system has been slowly shrinking over the past three years. This presents a different risk: potential stagnation or decline. However, the specific risk of support systems being strained by overly rapid expansion was not identified.

Potential Mitigations

• Your business advisor can help you investigate the reasons for the system's lack of growth by speaking with current franchisees.
• Questioning the franchisor about their future growth plans and strategies for system improvement is an important diligence step.
• An accountant should review the franchisor's financials to see how they are investing in the brand and franchisee support.

Explanation

This specific risk was not identified. Fox's Pizza Den has been in business and franchising since 1974, indicating a long operational history and an established brand. The management team also appears to have significant, long-term experience within the company and the pizza industry. Therefore, the risks associated with a new or unproven system are not applicable here.

Potential Mitigations

• A business advisor can help you evaluate how an established brand's history may impact its potential for future growth and innovation.
• It is still wise to discuss the franchisor's long-term strategic plans with them to understand how they intend to remain competitive.
• Consulting with your attorney about the terms for an established system can provide insight into industry standards.

Explanation

This specific risk was not identified. The business model, focused on pizza and related food items, is a well-established and enduring segment of the restaurant industry, not a temporary fad. The franchisor has been operating since 1974, demonstrating long-term market presence and consumer demand. The risk of the business being based on a short-lived trend appears to be low.

Potential Mitigations

• Your business advisor can still help you analyze the local competitive landscape for pizza restaurants.
• It is prudent to develop a business plan with your accountant that accounts for competition and market dynamics.
• Discussing the brand's strategies for staying current and competitive with the franchisor is recommended.

Explanation

This specific risk was not identified. The executive team disclosed in Item 2 has extensive, long-term experience with the Fox's Pizza Den system and the pizza industry. For example, the President has been involved with the company since 1996. This level of experience suggests a deep understanding of the business operations, though it does not eliminate other potential risks regarding franchisee support or system growth.

Potential Mitigations

• A business advisor can help you assess how management's experience translates into effective franchisee support.
• It is still important to speak with current franchisees about their direct experiences with the management team's support and guidance.
• Your attorney can review the franchisor's obligations in the agreement to ensure they are clearly defined, regardless of management experience.

Explanation

This specific risk was not identified. FDD Item 1 indicates that Fox's Pizza Den is a privately held corporation and does not mention ownership by a private equity firm. The risks specifically associated with a PE firm's potentially short-term investment horizon, such as rapid fee increases or cuts in support to maximize investor returns, do not appear to be present.

Potential Mitigations

• Your attorney should still review the assignment clause in the franchise agreement to understand what happens if the company is sold in the future.
• It is wise to research the history of the company's ownership with your business advisor.
• Asking the franchisor about any long-term plans for the company's ownership structure is a valid due diligence question.

Explanation

This specific risk was not identified. FDD Item 1 discloses affiliates, and the audited financial statements in Item 21 do not appear to be reliant on a parent company guarantee to demonstrate solvency. The franchisor seems to be a standalone entity with a long operating history, and there is no indication that the financials of an undisclosed parent company are necessary to evaluate the risk of this investment.

Potential Mitigations

• Your accountant should confirm the financial statements are prepared in accordance with GAAP and that no parent company guarantees are propping up the franchisor's financial position.
• It's a good practice for your attorney to verify the corporate structure and the role of all disclosed affiliates.
• Clarifying the financial and operational relationships between the franchisor and its affiliates with your business advisor is recommended.

Explanation

This specific risk was not identified in the FDD. Item 1 indicates the franchisor has no predecessors. Items 3 and 4 also do not disclose any litigation or bankruptcy history related to predecessors. Therefore, the risk of inheriting historical problems from a prior entity that operated the brand is not present based on these disclosures.

Potential Mitigations

• Your attorney should confirm that the information in Items 1, 3, and 4 is complete regarding any potential predecessor entities.
• A business advisor can help you research the company's history to ensure no unstated prior business names or structures exist.
• Even without predecessors, reviewing the franchisor's own history of litigation and franchisee relations remains crucial.

Explanation

This specific risk was not identified. FDD Item 3 states, 'No litigation is required to be disclosed in this Item.' This indicates there are no material pending or recent lawsuits involving the franchisor that allege franchise law violations, fraud, or other similar claims. The absence of such litigation is a positive indicator, though it does not eliminate all other business risks.

Potential Mitigations

• Your attorney should confirm the scope of the Item 3 disclosure and can conduct independent searches for litigation as part of due diligence.
• It is still crucial to speak with current and former franchisees about their experiences and any disputes they may have had, even if not rising to the level of litigation.
• A business advisor can help you assess the overall health of franchisor-franchisee relations.