Explanation

This specific risk was not identified in the FDD package. Yummy-town began franchising in 2018 and has grown to over 100 units, indicating it is past the initial startup phase. However, a new system generally presents higher risks, as its business model, brand recognition, and support structures are not yet fully proven in the marketplace. Financial stability can also be a greater concern with emerging franchisors.

Potential Mitigations

• When evaluating any franchise, especially a newer one, having an accountant thoroughly review the franchisor's financial statements for capitalization and stability is crucial.
• It is wise to consult a business advisor to research the experience and track record of the franchisor's management team.
• Your attorney can help you conduct due diligence by speaking with the earliest franchisees to join the system.

Explanation

The business operates in the boba or bubble tea market, which has experienced trends and shifts in consumer tastes. While popular, you should consider the long-term sustainability and demand for this specific type of beverage concept. The success of your investment could be tied to the durability of this market trend, and the FDD notes that business can be seasonal.

Potential Mitigations

• Engaging a business advisor to research the long-term market projections for the specialty tea and boba industry is recommended.
• You should carefully evaluate the franchisor’s plans for product innovation and menu diversification to adapt to changing consumer preferences.
• An accountant can help you model different revenue scenarios based on potential shifts in market trends.

Explanation

This risk was not identified, as Item 2 and Item 11 indicate that key personnel and trainers have several years of experience within the Happy Lemon system. In general, inexperienced management can pose a significant risk. A leadership team lacking a track record in franchising or the specific industry may struggle to provide effective support, training, and strategic direction, potentially jeopardizing the entire system's success.

Potential Mitigations

• It is always prudent to have a business advisor help you research the backgrounds and specific franchise industry experience of the key executives listed in Item 2.
• You should ask current franchisees about their direct experiences with the competence and responsiveness of the management team.
• Your attorney can help you understand the management structure and decision-making authority within the franchise.

Explanation

This risk was not identified. Item 1 indicates the ultimate parent is a publicly-traded company, not a private equity firm. Private equity ownership can introduce risks, as their primary goal is often a high return on investment over a relatively short period. This can sometimes lead to decisions that benefit short-term profits, such as cutting franchisee support or increasing fees, rather than focusing on the long-term health of the brand.

Potential Mitigations

• When a franchisor is PE-owned, a business advisor can help you research the firm's history with other franchise brands.
• It's wise to ask franchisees who have been in the system before and after a PE acquisition about any changes in culture or support.
• Your attorney should review the assignment clause in the franchise agreement to understand how a future sale of the system could affect you.

Explanation

This risk was not identified. Item 1 provides a detailed disclosure of the complex corporate structure, including the ultimate parent company. A failure to disclose a parent company can be a significant issue, as it may hide the true financial stability or controlling interests of the franchise system. The parent's financial health is particularly material if the franchisor is a new or thinly capitalized entity that relies on its parent for support.

Potential Mitigations

• Your attorney should always verify if a parent company guarantee is provided and if its financials should be included in Item 21.
• If a franchisor is newly formed, an accountant's review of its capitalization is crucial to assess its ability to operate independently.
• A business advisor can help you investigate the corporate structure for any undisclosed controlling entities.

Explanation

This risk was not identified as Item 1 explicitly states, "We have no predecessors." Generally, a predecessor is a company from which the franchisor acquired the main assets of the business. It is important to know about predecessors because their business history, including any litigation or bankruptcy, can provide crucial insight into the historical health and potential inherited problems of the franchise system you are considering joining.

Potential Mitigations

• Your attorney should always confirm the predecessor history disclosed in Item 1 of the FDD.
• If a predecessor exists, it is important to review their litigation and bankruptcy history in Items 3 and 4.
• A business advisor can assist in researching the public reputation and operational history of any listed predecessor.