Explanation

This risk was not identified as the franchisor is a new system with no operating franchised outlets to date, so there is no history of franchisee turnover. Tracking franchisee turnover in Item 20 is crucial in future FDDs, as high rates of terminations, non-renewals, or closures can signal systemic problems, such as franchisee unprofitability or poor franchisor support.

Potential Mitigations

• As this is a new system, speaking with the first few franchisees who open will be vital; your attorney can help you prepare questions about their experience.
• Your business advisor can help you establish a strong relationship with other franchisees as the system grows to share information and experiences.
• When future FDDs are issued, having an accountant analyze the turnover data in Item 20 will be a key part of your ongoing risk assessment.

Explanation

This risk was not identified. Item 20 shows that the system is new, with only two franchise agreements signed and no outlets yet open, so there is no evidence of overly rapid growth. In franchising, rapid expansion can sometimes strain a franchisor's ability to provide adequate support, training, and quality control to its franchisees, potentially diluting the brand's value.

Potential Mitigations

• Your accountant can help you analyze the franchisor's future growth plans in relation to its financial capacity to provide support.
• Engaging a business advisor to monitor the quality of franchisor support as the system expands can provide early warnings of potential issues.
• It is wise to ask your attorney about any contractual commitments the franchisor has made regarding support levels as the system grows.

Explanation

This risk was not identified in the FDD package. The franchisor in Item 1 is identified as a new, private LLC without mention of private equity ownership. This risk matters because private equity firms may prioritize short-term returns for their investors over the long-term health of the franchise system, which can sometimes lead to increased fees, reduced support, or a quick sale of the company.

Potential Mitigations

• Should the franchisor be sold in the future, it would be wise to have your attorney review the assignment provisions in the Franchise Agreement.
• Your business advisor can help you research the track record of any potential future buyer, particularly if it is a private equity firm.
• Maintaining a strong franchisee association can provide collective bargaining power if a new owner implements unfavorable changes.

Explanation

This risk was not identified. The FDD discloses an affiliate, Till Rock Company LLC, which owns the intellectual property and proprietary software. While the franchisor itself is new and thinly capitalized, the relationship with the affiliate seems to be disclosed. It is important for a franchisee to understand the role of parent or affiliate companies, especially if they guarantee obligations or are sole suppliers, as their financial health can directly impact the franchise system's stability.

Potential Mitigations

• Your attorney should review the license agreement between the franchisor and its affiliate to understand its terms and stability.
• An accountant can analyze the financials of any parent or guarantor entity if they are provided, to assess the overall financial strength behind the franchisor.
• A business advisor can help you understand the operational dependencies on any affiliate companies and the risks involved.

Explanation

This risk was not identified, as Item 1 states the franchisor has no predecessor company. When a franchisor has a predecessor, it is important to review their history for issues like litigation, bankruptcy, or high franchisee turnover. These could indicate inherited problems or a pattern of poor performance that might continue under the new entity, affecting your investment.

Potential Mitigations

• If a franchisor has a predecessor, your attorney should carefully examine their history as disclosed in Items 1, 3, and 4.
• Independent research into a predecessor's reputation, conducted with a business advisor, can reveal issues not fully detailed in the FDD.
• When predecessors exist, speaking with long-term franchisees who operated under the previous ownership is a critical due diligence step.

Explanation

This risk was not identified in the FDD, as Item 3 discloses no material litigation involving the franchisor. A pattern of litigation, especially lawsuits initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may suggest systemic problems with the franchisor's business practices, disclosure integrity, or relationship with its franchisees.

Potential Mitigations

• It is always a good practice to have your attorney conduct an independent public records search for litigation involving the franchisor or its principals.
• A business advisor can help you formulate questions for current franchisees regarding any disputes or legal issues they may be aware of within the system.
• Understanding the dispute resolution process outlined in the Franchise Agreement is important, and your attorney can explain the potential costs and procedures.