Explanation

This risk was not identified in the FDD package. Rapid system growth can strain a franchisor's resources, potentially leading to inadequate support, training, and quality control for franchisees. Monitoring the rate of new franchise sales against the franchisor's capacity to support them is an important aspect of due diligence.

Potential Mitigations

• It is beneficial to ask current franchisees about the quality and responsiveness of the franchisor's support systems.
• A review of the franchisor's hiring and infrastructure development plans with your business advisor can offer insight into their growth management.
• An accountant can help assess if the franchisor's financial statements show sufficient investment in support infrastructure to match growth.

Explanation

This risk was not identified in the FDD package. FranNet has been operating and franchising for many years. An unproven system carries higher risks, as its business model, brand recognition, and support structures are not yet time-tested. Prospective franchisees in such systems face greater uncertainty regarding long-term viability and profitability.

Potential Mitigations

• Assessing the business experience of the management team in both the industry and in franchising is a prudent step for any system.
• Speaking with the earliest-joining franchisees can provide valuable insight into the system's evolution and the franchisor's learning curve.
• An accountant's review of the franchisor's capitalization is important to ensure it has the financial resources to sustain itself through its growth phases.

Explanation

This risk was not identified in the FDD package. The franchise consulting business model is established. A fad business is one tied to a fleeting trend, which can create significant risk for franchisees who are bound by long-term contracts. Once consumer interest wanes, the business may no longer be viable, but your contractual obligations to pay fees would likely continue.

Potential Mitigations

• A business advisor can assist in researching the long-term market demand for the core service or product offered by any franchise.
• It is wise to evaluate a franchisor's plans for innovation and adaptation to changing market conditions.
• Your financial advisor can help you assess a business model’s resilience to economic shifts and its sustainability beyond current trends.

Explanation

This risk was not identified in the FDD package. The executive team detailed in Item 2 appears to have extensive experience in the franchise consulting industry. Inexperienced management can be a significant risk, as it may lead to underdeveloped systems, poor strategic decisions, and inadequate franchisee support. Assessing the leadership's background in both franchising and the specific industry is a key part of due diligence.

Potential Mitigations

• Thoroughly vetting the backgrounds of the management team is a crucial step in evaluating any franchise opportunity.
• Speaking with existing franchisees about their confidence in the leadership team provides direct insight into their capabilities.
• A business advisor can help you analyze the depth and relevance of the management team's experience as disclosed in Item 2.

Explanation

This risk was not identified in the FDD package. Item 1 indicates FranNet is owned by its members, not a private equity firm. When a franchisor is PE-owned, there can be a risk of decisions prioritizing short-term investor returns over the long-term health of franchisees. This could manifest as increased fees, reduced support, or pressure to use affiliated vendors.

Potential Mitigations

• When evaluating a PE-owned franchisor, researching the firm's track record with other franchise brands is advisable.
• A conversation with franchisees who have been with a system before and after a PE acquisition can offer valuable perspectives.
• Your attorney should review any clauses that give the franchisor broad rights to sell the system, which can be more likely with PE ownership.

Explanation

This risk was not identified in the FDD package. The FTC Rule requires disclosure of parent companies and may require their financial statements if they guarantee the franchisor's obligations or are otherwise fundamental to the franchise. Failing to provide this information can obscure the true financial backing and stability of the franchisor, which is a critical piece of information for your investment decision.

Potential Mitigations

• Your attorney can help verify the franchisor's corporate structure and determine if a parent company's financial information should have been included.
• If a parent entity provides a guarantee, it is crucial that your accountant reviews the parent's financials for stability.
• You should always question the relationship between the franchisor and any affiliated companies mentioned in the FDD.

Explanation

This risk was not identified in the FDD package. Item 1 discloses a predecessor, FranNet Franchising, LLC, and other historical entities, and there are no apparent negative issues being obscured. Inadequate disclosure about predecessors can hide a history of litigation, bankruptcy, or high franchisee failure rates, preventing you from seeing the true track record of the business system.

Potential Mitigations

• Your attorney should always carefully review the predecessor information disclosed in Items 1, 3, and 4.
• If a system was acquired from a predecessor, conducting independent research on that entity's history can provide a fuller picture.
• Asking long-term franchisees about their experiences under any previous ownership is a valuable due diligence step.