Explanation

This risk was not identified in the FDD package. Rapid system growth can sometimes strain a franchisor's ability to provide adequate support to all franchisees. It is a factor to consider, as it can affect the quality of training, site selection assistance, and ongoing operational guidance you receive. A balanced growth rate is often a positive sign of a healthy, manageable system.

Potential Mitigations

• Consulting with your business advisor can help you assess if the franchisor's support infrastructure is scalable to match its growth plans.
• Engaging with a range of existing franchisees, both new and established, can provide insight into the consistency and quality of support.
• An accountant should review the franchisor's financial statements to determine if they have allocated sufficient capital to support system expansion.

Explanation

This risk was not identified in the FDD package, as Hardee's is a very established and long-standing brand. For a new or emerging franchise, a lack of operating history could mean the business model is unproven and support systems are underdeveloped. This increases the investment risk, as there is less historical data to validate the concept's long-term viability and profitability for franchisees.

Potential Mitigations

• For any new system, your business advisor should help you conduct thorough due diligence on the founders' industry and franchising experience.
• Speaking with the earliest franchisees of a new system is critical to understanding the realities of the business and the franchisor's support capabilities.
• An accountant's review of the capitalization of a start-up franchisor can help determine if it has adequate funds to support its initial growth phase.

Explanation

This risk was not identified in the FDD package, as Hardee's is in a well-established fast-food sector. A 'fad' business is one based on a short-term trend, which can be risky for a long-term investment like a franchise. When consumer interest wanes, sales can plummet, but your long-term contractual obligations to the franchisor, such as royalty payments, remain.

Potential Mitigations

• A business advisor can help you research the long-term market demand for the products or services offered.
• It is wise to evaluate the franchisor's plans for innovation and adaptation to changing consumer tastes.
• Your financial advisor can assist in assessing the business model's resilience to economic shifts and evolving trends.

Explanation

This risk was not identified in the FDD package, as the management team listed in Item 2 appears to have significant experience in the restaurant and franchise industries. For any franchise, it is important that the management team has relevant experience. A lack of experience in franchising, specifically, could indicate that the company may struggle with providing effective support, training, and strategic direction for its franchisees.

Potential Mitigations

• A business advisor can help you research the backgrounds of the key executives listed in Item 2.
• Asking existing franchisees about their direct experiences with the management team can provide valuable, real-world insights.
• Reviewing the management team's tenure with the company can help you understand the stability of the franchisor's leadership.

Explanation

This risk was not identified in the FDD package. The franchisor clearly discloses its parent companies and provides their financial statements in Item 21. For any franchise, if a parent company guarantees the franchisor's obligations or is essential to the system's operation, its financial health is material. Failure to disclose such a parent or its financials when required could hide significant risks from a prospective franchisee.

Potential Mitigations

• Your accountant should always review the financial statements of any parent company that guarantees the franchisor's obligations.
• An attorney can help determine if the parent's financials should have been included based on FTC rules if they are missing.
• If the franchisor is a newly-formed subsidiary, understanding the financial strength of the parent is critical, a task for your accountant.

Explanation

This risk was not identified in the FDD package, as the franchisor's history and its relationship with its predecessor, Hardee's Food Systems, Inc., are described in Item 1. It is important to review predecessor history because past issues, such as high franchisee turnover or litigation under previous ownership, could indicate unresolved systemic problems that might affect your business in the future.

Potential Mitigations

• A franchise attorney can help you scrutinize the FDD for any information related to predecessor companies.
• If a system was acquired, researching the predecessor's public track record can uncover historical issues; a business advisor may assist.
• Asking long-term franchisees about their experience under any prior ownership can provide valuable context.