Explanation

This risk was not identified in the FDD package, as Item 20 shows no franchised outlets have ever operated, so there is no history of franchisee turnover. However, the complete lack of an operating history for franchisees is a significant risk in itself, as it means the franchisor's support system and business model are entirely untested in a franchise context. This specific concern is analyzed under the 'New/Unproven Franchise System' risk.

Potential Mitigations

• Given the lack of a track record, your business advisor should help you perform enhanced due diligence on the franchisor's affiliate-owned operations.
• It is crucial that your attorney help you understand the heightened risks associated with joining a system with no franchisee operating history.
• An accountant can help you model more conservative financial projections to account for the uncertainties of a new, unproven franchise system.

Explanation

This risk was not identified, as the system has not yet begun selling franchises and therefore shows no signs of rapid growth. The risk of rapid expansion would arise if a franchisor sells franchises faster than it can build the infrastructure to support them, potentially leading to inadequate training, site selection, and operational assistance for franchisees. You should monitor the pace of growth if you join the system.

Potential Mitigations

• It is prudent to ask the franchisor about their controlled growth strategy and how they plan to scale support systems to match franchisee growth.
• Engaging a business advisor can help you assess whether the franchisor's leadership team has the experience to manage future growth effectively.
• Should the system grow rapidly, consulting with your attorney on your contractual rights to support would be a wise step.

Explanation

This risk was not identified in the FDD package. The documents do not indicate that the franchisor is owned or controlled by a private equity firm. Private equity ownership can sometimes introduce risks related to prioritizing short-term investor returns over the long-term health of the franchise system. The franchisor appears to be privately held by its founders.

Potential Mitigations

• It is still valuable to have your attorney confirm the ownership structure of the franchisor and any affiliated entities.
• A business advisor can help you research the background of the principal owners to understand their business philosophy and track record.
• You should ask the franchisor about their long-term vision for the brand and their commitment to franchisee success.

Explanation

This risk was not identified. FDD Item 1 appears to properly disclose the franchisor's affiliate companies and does not mention a parent company. A parent company's financial status can be critical, especially if the franchisor is a new or thinly capitalized subsidiary. The absence of a parent company means the franchisor's own financial health, as disclosed in Item 21, is the primary factor to consider for stability.

Potential Mitigations

• Your accountant should perform a thorough analysis of the franchisor's standalone financial statements provided in Item 21.
• It's a good practice to have your attorney verify the corporate structure to confirm there are no undisclosed controlling entities.
• A discussion with your business advisor can help assess if the franchisor has sufficient resources to operate successfully without parent company backing.

Explanation

This risk was not identified in the FDD. Item 1 explicitly states, "We have no parent or predecessor." This means the franchisor did not acquire the business from a prior company, and the history presented is its own. Therefore, there is no risk of hidden issues from a predecessor's operating history, such as undisclosed litigation or high franchisee failure rates under a previous owner.

Potential Mitigations

• It is still a valuable exercise to conduct online searches for the brand name and principals to ensure no prior business activities under a different entity name exist.
• Your attorney can confirm the franchisor's corporate history through state business filings.
• Ask early employees or associates of the affiliate company about the brand's history, if possible, during your due diligence.

Explanation

This risk was not identified, as FDD Item 3 states, "No litigation is required to be disclosed in this Item." A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, is a significant red flag. The absence of such litigation is a positive indicator, though it is expected for a brand new franchisor with no franchisees.

Potential Mitigations

• Your attorney can conduct an independent search of court records to verify that no undisclosed litigation exists against the franchisor or its principals.
• It is a good practice to ask the franchisor directly if they are involved in any disputes that have not yet risen to the level of disclosable litigation.
• Periodically checking court dockets, even after you become a franchisee, can be a prudent step advised by your legal counsel.