Explanation

This risk was not identified in the FDD package. Item 20 data shows a low number of terminations, non-renewals, and other cessations relative to the system's size. High turnover can be a major red flag for systemic issues, such as a lack of profitability or poor franchisor support. Based on the provided data, this does not appear to be the case here.

Potential Mitigations

• It is still valuable to have your attorney help you formulate questions for current and former franchisees about their satisfaction with the system.
• A business advisor can help you analyze the Item 20 tables in any FDD to calculate turnover rates for comparison.
• During due diligence calls, asking franchisees about the reasons for any transfers or closures in their region can provide valuable insight.

Explanation

This risk was not identified. The FDD indicates that the franchisor, Freddy's, began franchising in 2004 and has grown to over 500 locations. This demonstrates a long operational history and a well-established franchise system. An unproven system would present higher risks related to brand recognition, operational methods, and franchisor support, which is not the case here.

Potential Mitigations

• When evaluating any franchise, it is wise to have your business advisor assess the maturity and stability of the brand in the marketplace.
• An accountant can review the financial statements of any franchisor to determine if they rely more on ongoing royalties than initial fees for income.
• Always consult with existing franchisees about the strength and longevity of the brand's concept with assistance from your attorney.

Explanation

This risk was not identified. The business model, centered on steakburgers and frozen custard, is based on classic American food service concepts rather than a niche or fleeting trend. These product categories have demonstrated long-term consumer demand. A fad-based business carries a higher risk of declining sales once public interest wanes, but that does not appear to be a primary concern here.

Potential Mitigations

• A business advisor can help you research the long-term market trends for any industry you consider entering.
• When analyzing a business, it's important to ask the franchisor about their strategy for product innovation and adaptation to stay relevant.
• Discuss the long-term viability and consumer demand for the core products with existing franchisees.

Explanation

This risk was not identified in the FDD. Item 2 shows that the franchisor's management team is composed of individuals with extensive experience at Freddy's and other major food service and franchise brands. Inexperienced leadership can pose a significant risk, as it may lead to poor strategic decisions and inadequate franchisee support, but that concern is not raised by the disclosures in this FDD.

Potential Mitigations

• It is always prudent to have a business advisor help you research the backgrounds of the key executives of any franchise system.
• Posing questions to existing franchisees about their confidence in the franchisor's management team is a key part of due diligence.
• Your attorney can help you understand the roles and responsibilities of the management team as outlined in the FDD.

Explanation

This risk was not identified. Item 1 of the FDD clearly discloses the parent companies, Freddy's Acquisition Intermediate, Inc. and Freddy's Acquisition Holdings, Inc. Furthermore, Item 21 and Exhibit D provide the audited consolidated financial statements of the ultimate parent, which also provides a full performance guarantee. The FDD appears to meet disclosure requirements regarding parent companies.

Potential Mitigations

• An attorney can help verify the corporate structure of a franchisor and determine if parent company financials are required and have been provided.
• If a parent company guarantee is offered, it's crucial for your legal counsel to review its terms to understand its enforceability and scope.
• Your accountant should always confirm that any provided financial statements, whether for the franchisor or a parent, meet required accounting standards.

Explanation

This risk was not identified. Item 1 of the FDD states the franchisor has no predecessors that must be included in the Item. A franchisor with a problematic predecessor history could inherit issues like unresolved litigation or a poor reputation, but that does not appear to be a concern based on these disclosures.

Potential Mitigations

• Your attorney can help you review Item 1 of any FDD to understand the franchisor's history and identify any disclosed predecessors.
• In cases with a predecessor, it's wise to conduct independent research on that entity's history with the help of a business advisor.
• Asking long-term franchisees about their experience under any previous ownership can reveal important historical context.

Explanation

This risk was not identified. Item 3 of the FDD states that no litigation is required to be disclosed. A pattern of franchisee-initiated lawsuits alleging fraud or franchisor-initiated suits against franchisees can be a major red flag indicating systemic problems. The absence of such disclosures is a positive factor for a prospective franchisee to consider.

Potential Mitigations

• It is always a crucial step for your attorney to carefully review the litigation history disclosed in Item 3 of any FDD.
• Independent online searches for news articles or legal databases concerning the franchisor can sometimes provide additional context, which your attorney can help assess.
• Discussing the franchisor's relationship with its franchisees is a key topic to raise during due diligence calls with current operators.