Explanation

This risk was not identified. The franchisor's audited financial statements in Exhibit C show positive net worth and profitability in recent years. While net income decreased in 2023, this was due to a one-time loan forgiveness in 2022; income from operations actually increased. An accountant's review is always recommended for a deeper financial health assessment, as a franchise system's stability is crucial for your long-term success.

Potential Mitigations

• A franchise accountant should be engaged to perform a detailed analysis of the franchisor's financial statements, including footnotes and cash flow trends.
• It is advisable to have your financial advisor assess the franchisor's business model to determine if it appears sustainable without heavy reliance on initial franchise fees.
• Understanding the franchisor's financial stability requires asking them direct questions about their capitalization and plans for supporting the system, which your attorney can help formulate.

Explanation

This risk was not identified in the FDD package. A franchise system that expands too quickly can strain its ability to provide necessary support to new franchisees. Such rapid growth may outpace the development of training, marketing, and operational assistance, potentially leaving you without adequate guidance despite paying fees for these services. This system appears to be shrinking, not growing rapidly.

Potential Mitigations

• Your business advisor can help assess whether a franchisor's growth plans are aligned with its capacity to provide quality support.
• Speaking with franchisees who opened at different stages of the system's growth can provide insight into the consistency of franchisor support, a task for your due diligence team.
• An accountant's review of the franchisor's balance sheet and cash flow statement can help determine if they have the financial resources to support their stated growth.

Explanation

This risk was not identified. The franchisor and its predecessor have been offering franchises since 1991, indicating a long-established system. New franchise systems carry higher risk due to unproven business models, minimal brand recognition, and potentially underdeveloped support structures. Investing in a new system requires extensive due diligence on the founders' experience and the system's capitalization to ensure it has a foundation for long-term viability.

Potential Mitigations

• When considering a new system, it is prudent to have a business advisor thoroughly vet the background and industry experience of the franchisor's management team.
• For an unproven concept, an accountant's analysis of the franchisor's financial statements is critical to assess if it is well-capitalized for growth.
• Your attorney can help you seek more favorable terms to compensate for the higher risks associated with investing in a new franchise system.

Explanation

This risk was not identified, as the concept of a full-service pizza restaurant is a well-established and durable business model, not one based on a recent trend. Investing in a business concept tied to a fad can be risky, as consumer interest may decline, potentially leaving you with an obsolete business but an ongoing franchise contract. It's important to assess if a concept has sustainable, long-term market demand.

Potential Mitigations

• A business advisor can help you conduct market research to distinguish between a sustainable business model and a short-term fad.
• Evaluating a franchisor's history of innovation and adaptation can provide insight into its potential for long-term relevance.
• Your accountant can help analyze the business model's resilience and potential profitability beyond any initial trend-driven success.

Explanation

This risk was not identified. Item 2 shows that the key executives at Green Mill Restaurants, LLC (Green Mill LLC) and its affiliates have extensive, long-term experience within the restaurant industry and, for many, with the Green Mill brand itself. A lack of relevant management experience in franchising or the specific industry can be a major red flag, as it may signal underdeveloped support systems and an inability to effectively guide franchisees.

Potential Mitigations

• It is wise to have a business advisor help you thoroughly investigate the franchising and industry-specific experience of the franchisor's key leadership team.
• Contacting existing franchisees is a vital step to gauge the quality and effectiveness of management's support and strategic direction.
• Your attorney can help formulate questions for the franchisor regarding the specific experience of the team that will be supporting you.

Explanation

This risk was not identified, as Item 1 does not indicate that the franchisor is owned by a private equity firm. When a franchisor is PE-owned, there can be a risk that decisions are focused on short-term investor returns rather than the long-term health of the franchise system and its franchisees. This can sometimes lead to increased fees, reduced support, or pressure to use affiliated vendors to improve quarterly results.

Potential Mitigations

• A business advisor can assist in researching a private equity owner's track record with other franchise brands they have managed.
• It is important to ask current franchisees about any changes to the system's culture, support, or cost structure since a PE acquisition.
• Your attorney should carefully review any assignment clauses in the Franchise Agreement that could facilitate a sale of the system.

Explanation

This risk was not identified. The FDD clearly discloses the parent company, Hightop Brands, LLC, in Item 1. When a franchisor is a subsidiary, it's important that the parent company is also disclosed, especially if it guarantees the franchisor's performance or is a critical supplier. A failure to disclose a parent company can obscure the true financial backing and overall stability of the franchise system, hiding potential risks from prospective franchisees.

Potential Mitigations

• Your attorney should verify the corporate structure and identify all parent and affiliate companies involved in the franchise system.
• An accountant's review is necessary to determine if a parent company's financial statements should have been included in the FDD for a complete risk assessment.
• It is beneficial to ask the franchisor to clarify the relationship and roles between itself and its parent company.

Explanation

This risk was not identified. Item 1 discloses the franchisor's predecessor, and Items 3 and 4 show no negative history of litigation or bankruptcy for that entity. In some cases, franchisors may not fully disclose the history of predecessors from whom they acquired the system. This can hide past problems like high franchisee failure rates or legal disputes, preventing a full understanding of the system's historical challenges and inherited issues.

Potential Mitigations

• Your attorney should carefully analyze the predecessor information disclosed in Items 1, 3, and 4.
• Conducting independent research on the predecessor's business history can sometimes uncover issues not detailed in the FDD.
• Asking long-term franchisees about their experience under any previous ownership is a valuable part of due diligence.

Explanation

This risk was not identified, as Item 3 states that there is no litigation that requires disclosure. A pattern of lawsuits filed by franchisees against the franchisor alleging fraud or misrepresentation, or a high number of lawsuits initiated by the franchisor against its franchisees, can be a major red flag. It may indicate systemic problems with the franchisor's practices, disclosure integrity, or relationship with its franchisees.

Potential Mitigations

• It is essential for your attorney to thoroughly review the details of any disclosed litigation in Item 3.
• Your legal counsel can perform independent research to find more information about disclosed cases, which may not be fully detailed in the FDD.
• Discussing any disclosed litigation with current and former franchisees can provide valuable context beyond the FDD's summary.