Explanation

This specific risk was not identified in the FDD package. The tables in Item 20 show zero terminations, non-renewals, or cessations for franchised outlets in the last three fiscal years. However, it is a very new franchise system that is growing primarily by converting existing company-owned locations into franchises. High franchisee turnover is a critical red flag in established systems, often signaling franchisee dissatisfaction or lack of profitability.

Potential Mitigations

• Given the system's youth, speaking with a wide range of the earliest franchisees listed in Item 20 is critical for your due diligence.
• A business advisor can help you analyze the company-owned store data to understand the performance of locations before they are converted to franchises.
• Your attorney can help you frame questions for the franchisor regarding their long-term support plans as the system matures.

Explanation

This risk was not identified in the FDD. The business model, which involves selling sushi and related Japanese food items, is well-established in the U.S. market and has demonstrated long-term consumer demand. It is not considered to be a fad. A fad business is one tied to a fleeting trend, which can create significant risk for franchisees who are locked into long-term agreements after consumer interest has faded.

Potential Mitigations

• It is still prudent to conduct your own market research with a business advisor to confirm sustained demand for these products in your specific area.
• Your financial advisor can help you assess the business model's resilience to local economic changes and competition.
• Engage your attorney to review the franchise agreement's term length to ensure it aligns with your long-term business goals.

Explanation

This risk was not identified. Item 2 of the FDD details the business experience of the management team, showing that key personnel have significant prior experience in the food service industry, including with major retailers like Walmart and Whole Foods Market, as well as with other sushi franchise systems such as Hissho Sushi and Fujisan Franchising Corp. This level of relevant industry and franchising experience is a positive factor for a new system.

Potential Mitigations

• You should still verify the roles and accomplishments of the management team through independent research, which a business advisor can assist with.
• When speaking with current franchisees, inquire about their direct experiences with the management team's competence and support.
• Consult with your attorney to understand the management structure and decision-making authority within the company.

Explanation

This risk was not identified in the FDD package. Item 1 identifies the franchisor's parent company as Hana Group US, LLC and does not mention any ownership by a private equity firm. Private equity ownership can sometimes lead to a focus on short-term returns over the long-term health of the franchise system, which can be a risk for franchisees.

Potential Mitigations

• Your attorney can help you verify the franchisor's corporate ownership structure through public records if you have concerns.
• A business advisor can research the history and reputation of the parent company, Hana Group US, LLC.
• Engaging with current franchisees can provide insight into the operational philosophy of the current ownership.

Explanation

This risk was not identified. The FDD's Item 1 clearly discloses the parent company, Hana Group US, LLC. Failure to disclose a parent company, or provide its financials when it guarantees the franchisor's obligations, can obscure a complete view of the system's financial backing and stability.

Potential Mitigations

• Your accountant should still review the provided franchisor financials carefully to assess its standalone viability.
• It is wise to ask your attorney to confirm if any guarantees from the parent company exist that would necessitate the disclosure of its financials.
• A business advisor can help research the parent company to understand its overall health and relationship with the franchisor subsidiary.

Explanation

This risk appears to be low. Item 1 discloses a detailed history of predecessor companies, including Genji Sushi Express, Inc. and Peace Dining Corporation. However, Items 3 and 4 state there is no relevant litigation or bankruptcy history to disclose for the franchisor or these predecessors. A history of failures, litigation, or bankruptcy under a predecessor could signal underlying problems with the business model or management that may carry over to the current franchisor.

Potential Mitigations

• You could ask your attorney to conduct independent searches for information regarding the predecessor companies for additional verification.
• Speaking with long-term employees of the company, if possible, may provide historical context.
• A business advisor can help you assess how the system may have changed or evolved from its predecessor's operations.

Explanation

This risk was not identified. Item 3 of the FDD states, “There is no litigation that must be disclosed in this Item.” A pattern of litigation, particularly franchisee-initiated lawsuits alleging fraud or misrepresentation, is a major red flag indicating potential systemic issues with the franchisor's practices or the viability of the system.

Potential Mitigations

• Your attorney can perform independent public record searches to verify the absence of significant litigation.
• It is still crucial to ask current and former franchisees about their relationship with the franchisor and whether they have had disputes.
• Maintaining open communication and meticulously documenting all interactions with the franchisor is a good practice, as advised by your attorney.