Explanation

As a new franchise system that began operating in 2024, there is no history of franchisee turnover. Item 20 tables show that no franchises have been terminated, ceased operations, or been transferred. While this is normal for a new system, it means there is no data to assess franchisee satisfaction or unit-level success over time. This information will become a critical indicator of system health in future FDDs.

Potential Mitigations

• In future years, a careful review of the Item 20 tables with your accountant will be essential to identify any negative trends in franchisee turnover.
• When franchisees do begin to depart the system, making contact with them will be a crucial due diligence step, which a business advisor can help you prepare for.
• Your attorney can help you understand the different categories in Item 20, such as the distinction between a transfer and a termination.

Explanation

This risk was not identified. The business model, which centers on hot dogs, burgers, and fries, operates in a well-established and long-standing segment of the restaurant industry. While subject to intense competition, the core products are not based on a new or fleeting trend, reducing the risk that the business could be a short-lived fad.

Potential Mitigations

• A business advisor can help you research the long-term stability and trends within the fast-casual restaurant market in your specific geographic area.
• When evaluating any franchise, it is wise to consider with your financial advisor whether the concept has enduring customer appeal beyond current market trends.
• Your attorney can review the franchise agreement for flexibility in case menu adaptations are needed in the future to respond to changing consumer tastes.

Explanation

This risk was not identified. While the franchisor entity itself is new, Item 2 shows that its key executives have extensive prior experience in the restaurant and franchise industries. For example, the CEO has past leadership roles at Johnny Rockets and Peter Piper Pizza, and other executives have significant experience with established franchise systems like The Joint Chiropractic. This experience may help mitigate the risks associated with a new franchise system.

Potential Mitigations

• You should still verify the track records of the executives and the performance of the other franchise systems they managed by consulting with a business advisor.
• It is beneficial to ask the existing franchisees about their direct experiences with the management team's support and guidance.
• Your attorney can help you research public information or news articles related to the management team's previous business ventures.

Explanation

This risk was not identified in the FDD package. Item 1 indicates the franchisor is owned by a corporate parent, Franknfurters, Inc., not a private equity firm. This structure may suggest a focus on long-term brand building rather than the potentially shorter investment horizons and aggressive cost-cutting sometimes associated with private equity ownership.

Potential Mitigations

• It is still prudent to have your attorney investigate the ownership structure of the parent company to confirm there are no undisclosed controlling interests.
• A discussion with a business advisor can help you understand the potential benefits and drawbacks of different types of franchise ownership structures.
• Always ask your attorney to review the assignment clause in the franchise agreement to understand what happens if the franchisor is sold in the future.

Explanation

This risk of non-disclosure was not identified. The FDD clearly discloses in Item 1 that Franknfurters Franchising LLC is a subsidiary of its parent company, Franknfurters, Inc. However, the parent company's financial statements are not provided. While this may be permissible if the parent does not guarantee the franchisor's obligations, it limits your ability to fully assess the financial strength of the ultimate owner.

Potential Mitigations

• An accountant should review the franchisor's financials in Item 21 to determine if it appears adequately capitalized on its own.
• Your attorney can help clarify whether the parent company has any formal obligations or guarantees toward the franchisee.
• You might ask the franchisor if they are willing to voluntarily provide the parent company's financial statements for review by your accountant.

Explanation

This risk was not identified. Item 1 of the FDD states that the franchisor has no predecessors. The company is a new entity established in late 2023. This means there is no prior corporate history under a different name or ownership that could conceal past problems like litigation, bankruptcy, or franchisee failures.

Potential Mitigations

• Your attorney can conduct an independent public records search to verify the corporate history of the franchisor and its parent company.
• Always ask direct questions to the franchisor about the origin of the business concept and the history of its development before it became a franchise.
• A business advisor can help you evaluate the risks of a new company with no history versus an established one with a complex past.

Explanation

This risk was not identified in the FDD. Item 3 discloses that there has been no material litigation against the franchisor or its management. As a new company, this is expected, but it is a positive factor. It will be important to monitor this item in future FDDs for any emerging patterns of disputes.

Potential Mitigations

• Your attorney can perform an independent search of court records to verify that no undisclosed litigation exists.
• A crucial part of due diligence is to ask current franchisees about any disputes or disagreements they have had with the franchisor, even if they didn't result in litigation.
• Understanding the dispute resolution clauses in the franchise agreement with your attorney is vital in case a future conflict arises.