Gong Cha
Initial Investment Range
$184,500 to $627,060
Franchise Fee
$34,500
We offer unit franchises for the operation of a single store, operated under the “Gong cha®” trademark, that primarily offers and sells a variety of bubble tea blends, coffees and teas, smoothies, juices, and other related products using proprietary methods of operation.
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Gong Cha March 29, 2025 FDD Risk Analysis
Free FDD Library AI Analysis Date: July 16, 2025
DISCLAIMER: Not Legal Advice - For Informational Purposes Only. Consult With Qualified Franchise Professionals.
Franchisor Stability Risks
Start HereDisclosure of Franchisor's Financial Instability
Medium Risk
Explanation
The franchisor's audited financial statements show profitability, but this may be misleading. A significant portion of its revenue comes from service agreements with its parent company, not from core franchise operations. Item 21, Note 4, also indicates that approximately 45% of its 2024 revenue came from just three franchisees. This heavy reliance on related-party transactions and a few key franchisees creates a concentrated financial risk that may affect its long-term stability and ability to support you.
Potential Mitigations
- An experienced franchise accountant should analyze the financial statements, paying close attention to the footnotes on related-party transactions and revenue concentration.
- Discussing the franchisor's financial structure and its plan to diversify revenue sources with your business advisor is a crucial step.
- Your attorney should inquire about the stability of the agreements between the franchisor and its parent company.
High Franchisee Turnover
Medium Risk
Explanation
Item 20 data for the broader system (including master franchisees) shows some turnover. In 2024, there were 6 terminations and 2 non-renewals among sub-franchisees. More concerningly, Table 4(a) reveals that franchisor-affiliated stores saw a net decrease of 6 units in 2024, with 7 stores closing. The closure of company-affiliated stores could suggest underlying challenges with the business model's profitability or operations, which may impact your potential for success.
Potential Mitigations
- It is critical to contact current and former franchisees listed in Item 20 to discuss their experiences and reasons for leaving the system.
- Analyzing the turnover rates and company store closures with your franchise accountant can provide a clearer picture of system health.
- During your due diligence, ask the franchisor to explain the reasons for the affiliate-owned store closures.
Rapid System Growth
Low Risk
Explanation
This risk was not identified in the FDD Package. Rapid system growth can strain a franchisor's ability to provide adequate support, training, and quality control. If a system expands faster than its support infrastructure, new franchisees may find the promised assistance is diluted or unavailable, potentially affecting their opening process and ongoing operations. An analysis of the franchisor's financial and human resources is important to assess if they can sustain their growth.
Potential Mitigations
- Evaluating the franchisor's support staff to franchisee ratio with your business advisor can help gauge their capacity for support.
- Asking current franchisees about the quality and timeliness of the support they receive is a valuable due diligence step.
- Your accountant can review the franchisor's financials to determine if they are reinvesting sufficiently in support infrastructure.
New/Unproven Franchise System
High Risk
Explanation
The franchisor entity, Gong Cha USA Franchising, LLC (Gong Cha LLC), is a new company, formed in January 2023 and only began offering franchises in October 2023. Item 1 states clearly that the franchisor itself has never operated a Gong Cha store. While its management has prior industry experience, the franchising entity lacks a track record. This introduces risks associated with unproven support systems, new operational processes, and potential instability as the new entity establishes itself.
Potential Mitigations
- Engage a business advisor to thoroughly vet the management team's prior success in supporting franchisees in their previous roles.
- Speaking with the very first franchisees of this new entity will provide direct insight into the quality of support from this specific franchisor.
- Your attorney might negotiate more protective terms in the franchise agreement to offset the risks of a new franchisor.
Possible Fad Business
Low Risk
Explanation
This risk was not identified in the FDD Package. A 'fad' business is one tied to a short-lived trend, which can pose a significant risk to a long-term investment like a franchise. It is important to assess whether customer demand for the core product or service is sustainable over the 10-year life of the franchise agreement. Evaluating the franchisor's commitment to research, development, and menu innovation can provide insight into its plans for long-term market relevance.
Potential Mitigations
- A business advisor can help you conduct independent market research to evaluate the long-term consumer demand for bubble tea and related products.
- Inquiring about the franchisor's budget and plans for ongoing research and development is a crucial question for your due diligence calls.
- Assess the brand's ability to adapt its menu and concept to evolving consumer tastes by discussing this with existing franchisees.
Inexperienced Management
Medium Risk
Explanation
While the management team detailed in Item 2 has experience with other established brands, the franchisor entity itself, Gong Cha LLC, has only been in operation since 2023 and has never operated a Gong Cha store. This lack of direct operational experience as a company could present challenges in providing practical, field-tested support and fully understanding the day-to-day issues you might face. The quality of support may rely heavily on the individual experience of its staff rather than proven corporate systems.
Potential Mitigations
- A thorough review of the backgrounds of the support team, not just senior leadership, can provide insight into their practical experience.
- It is important to ask current franchisees about the quality and practicality of the operational guidance they receive.
- Your business advisor can help you assess whether the management's experience is directly transferable and relevant to this specific concept.
Private Equity Ownership
High Risk
Explanation
Item 1 describes a complex corporate structure where the ultimate parent company was acquired by a private equity firm in 2019. This ownership structure can create risks for franchisees. Decisions may prioritize short-term investor returns over the long-term health of the system, potentially leading to increased fees, reduced franchisee support, or pressure to use specific vendors. The focus may be on a profitable exit strategy for the firm rather than sustained franchisee profitability.
Potential Mitigations
- Researching the private equity firm's reputation and its track record with other franchise brands is an important due diligence step.
- Discussing any changes in system focus, fees, or support levels since the acquisition with long-term franchisees can be very revealing.
- Your attorney should carefully review the franchisor's rights to sell or assign the system and the potential impact on your agreement.
Non-Disclosure of Parent Company
Low Risk
Explanation
This risk was not identified in the FDD Package. Franchise disclosure rules require parent company financial statements to be included if the parent guarantees the franchisor's obligations or if the franchisor is a new, thinly capitalized entity. Not providing these financials when required can obscure the true financial health and backing of the franchise system. It's crucial to ensure the entity you are contracting with has the financial capability to fulfill its promises.
Potential Mitigations
- If the franchisor is a new or special-purpose entity, your franchise accountant should verify if parent company financials are required but have been omitted.
- Your attorney can help assess if a parent company guarantee is offered and if it provides meaningful financial security.
- Always question the financial stability of a franchisor that appears to be a shell entity without strong, visible backing.
Predecessor History Issues
Medium Risk
Explanation
Item 1 discloses predecessors, and Item 3 reveals these entities have a history of regulatory litigation. Specifically, the predecessor GCI was subject to actions by California, Maryland, and Virginia for registration and disclosure violations. While the franchisor entity has changed, the franchise system and some of its leadership carry this history forward. This pattern suggests past compliance issues that could be indicative of the overall corporate culture you would be joining.
Potential Mitigations
- Your attorney should carefully review the details of all predecessor litigation disclosed in Item 3.
- Inquiring with the franchisor about what has changed in their compliance procedures since the predecessor's legal issues is critical.
- Speaking with franchisees who have been with the system through the transition from the predecessor can provide valuable context.
Pattern of Litigation
High Risk
Explanation
Item 3 discloses a significant pattern of regulatory actions against both the franchisor and its predecessor for violating state franchise laws. These include actions in California, Maryland, and Virginia for offering and selling franchises without proper registration and failing to provide proper disclosures. This history of non-compliance is a major red flag, suggesting potential issues with the franchisor's internal legal and compliance culture which could create future risks for you.
Potential Mitigations
- A thorough discussion with your franchise attorney about the implications of this litigation history is essential.
- It is critical to ask the franchisor directly about the steps they have taken to ensure future compliance with all state and federal franchise laws.
- Your attorney should confirm that the franchisor is currently registered and in good standing in your state.
Disclosure & Representation Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
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Financial & Fee Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
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Legal & Contract Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
Unlock Full Risk Analysis
Purchase the complete risk review to see all 102 risks across all 10 categories.
Territory & Competition Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
Unlock Full Risk Analysis
Purchase the complete risk review to see all 102 risks across all 10 categories.
Regulatory & Compliance Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
Unlock Full Risk Analysis
Purchase the complete risk review to see all 102 risks across all 10 categories.
Franchisor Support Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
Unlock Full Risk Analysis
Purchase the complete risk review to see all 102 risks across all 10 categories.
Operational Control Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
Unlock Full Risk Analysis
Purchase the complete risk review to see all 102 risks across all 10 categories.
Term & Exit Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
Unlock Full Risk Analysis
Purchase the complete risk review to see all 102 risks across all 10 categories.
Miscellaneous Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
Unlock Full Risk Analysis
Purchase the complete risk review to see all 102 risks across all 10 categories.
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