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 to its franchisees. When a franchisor expands too quickly, its resources may be stretched thin, potentially leading to a decline in the quality of services provided to the entire system and diminishing the brand's value.

Potential Mitigations

• Engaging a business advisor to evaluate the franchisor's support infrastructure in relation to its size is a prudent step.
• An accountant should review the franchisor's financials to assess whether they are reinvesting sufficiently to support their existing franchisees.
• Your attorney can help you understand the support commitments detailed in the franchise agreement.

Explanation

This risk was not identified in the FDD Package. The franchisor began offering franchises in 1991, indicating it is an established system. Investing in a new or unproven franchise system carries higher risk because the business model, brand recognition, and support systems may not be well-established or validated in the marketplace. The success of early franchisees is often more uncertain in such systems.

Potential Mitigations

• A business advisor can help you investigate the track record of any franchise system you consider.
• Having an accountant analyze the financial stability and capitalization of a young franchisor is critical.
• Your attorney should review the FDD for any special risks associated with a new system.

Explanation

This risk was not identified in the FDD Package. The business model, which involves selling sandwiches and pasta, is a long-standing and stable segment of the restaurant industry, not a temporary fad. A fad-based business can be risky because consumer interest may decline rapidly, leaving you with a long-term contractual obligation for a business with diminishing demand and potential for failure.

Potential Mitigations

• A business advisor can help you research the long-term market trends for any industry you are considering entering.
• Your financial advisor should assist in evaluating the sustainability of a business concept beyond current trends.
• It is wise to review the franchisor's plans for product innovation and adaptation with your attorney.

Explanation

This risk was not identified in the FDD Package. Item 2 indicates that the key management personnel, including the CEO, have extensive experience with the company and in the industry, some since 1989. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, inadequate support for franchisees, and operational inefficiencies that can negatively impact your business.

Potential Mitigations

• It is always prudent to have a business advisor help you research the backgrounds of the franchisor's key executives.
• Speaking with current franchisees can provide insight into the management team's effectiveness and responsiveness.
• Your attorney can help you understand how the franchise agreement protects you if there are changes in management.

Explanation

This risk was not identified in the FDD Package. There is no indication in Item 1 that the franchisor is owned by a private equity firm. When a franchisor is owned by a private equity firm, there can be a risk that short-term financial goals are prioritized over the long-term health of the franchise system and the profitability of individual franchisees.

Potential Mitigations

• A business advisor can help you investigate the ownership structure of any franchise system.
• If private equity is involved, your attorney should review the FDD for any disclosures about their investment strategy and timeline.
• An accountant can analyze financial statements for signs of aggressive cost-cutting or other typical private equity-driven changes.

Explanation

This risk was not identified in the FDD Package. Item 1 clearly states that the franchisor has no parent company. When a franchisor is a subsidiary, failing to disclose the parent company's financial information can obscure the true financial health and stability of the overall enterprise, especially if the subsidiary is thinly capitalized and relies on the parent for support or guarantees.

Potential Mitigations

• Your attorney can help verify the corporate structure disclosed in Item 1.
• If a parent company exists, an accountant should review both the franchisor's and the parent's financial statements.
• A business advisor can help you understand the potential implications of a parent-subsidiary relationship.

Explanation

This risk was not identified in the FDD Package. Item 1 states the franchisor has no predecessors. A predecessor is a company from which the franchisor acquired a major portion of its assets. A lack of information about a predecessor's history, including any past litigation or franchisee failures, could hide significant problems that may have been inherited by the current franchisor.

Potential Mitigations

• Your attorney should confirm the accuracy of the predecessor information disclosed in Item 1.
• A business advisor can help you conduct independent research on a company's history if a predecessor is identified.
• Speaking with long-term franchisees can reveal important history about the system under previous ownership.

Explanation

This risk was not identified in the FDD Package. Item 3 states that no litigation must be disclosed. A pattern of litigation against a franchisor, particularly suits from franchisees alleging fraud or misrepresentation, can be a major red flag. It may indicate systemic problems within the franchise, such as unfulfilled promises, a flawed business model, or a contentious relationship between the franchisor and its franchisees.

Potential Mitigations

• It is wise to have your attorney conduct an independent search for litigation involving the franchisor, beyond what is disclosed in Item 3.
• A business advisor can help you understand the nature of any disclosed litigation and its potential impact on the system.
• Always ask current and former franchisees about their experiences with disputes and the franchisor's legal department.