Explanation

This risk was not identified. The provided audited financial statements for L & L Franchise, Inc. (L&L) show consistent profitability, positive net worth, and strong revenue primarily from royalties, not just franchise sales. This financial health suggests L&L has the resources to support its obligations and the brand. Generally, weak franchisor financials can jeopardize the support you receive and the system's viability.

Potential Mitigations

• An experienced franchise accountant should still review the complete financial statements, including all footnotes, to confirm financial health and stability.
• Discuss the franchisor's financial condition and its ability to support the system with your business advisor.
• Ask your attorney to verify if any financial performance bonds or escrow arrangements are required by state law, even for a healthy franchisor.

Explanation

The FDD's Item 20 data shows a consistent, though not extreme, number of franchise closures (listed as "Ceased Operations-Other Reasons") over the past three years: four in 2022, five in 2023, and six in 2024. While the annual turnover rate of 2-3% is not critically high for a system of this size, the steady pattern of closures could indicate underlying challenges for some franchisees. The reasons for these cessations are not specified.

Potential Mitigations

• It is crucial to contact a significant number of former franchisees from the list in Exhibit G to understand why they left the system.
• Your business advisor can help you calculate the precise turnover rates and compare them against industry benchmarks for similar restaurant concepts.
• A discussion with your attorney is recommended to understand if there are patterns in the locations or types of franchises that have closed.

Explanation

The franchise system is experiencing steady growth, expanding from 201 to 220 franchised units between the start of 2022 and the end of 2024. Given the franchisor's long history and strong financial statements, this rate of growth does not appear to be dangerously rapid or likely to outpace their ability to provide support. However, monitoring support quality remains important during any expansion.

Potential Mitigations

• In discussions with current franchisees, it is a good practice to inquire about the quality and responsiveness of the support they receive from the franchisor.
• Your business advisor can help you assess if the franchisor's corporate infrastructure seems adequate to handle its current growth trajectory.
• When speaking with the franchisor, asking about their plans for scaling support systems as the brand grows is advisable.

Explanation

This risk was not identified in the FDD package. L&L has been franchising since 1991 and has a substantial number of outlets, indicating it is a mature and proven franchise system. A new system can pose a higher risk due to unproven operations, lack of brand recognition, and potential instability, which does not appear to be the case here.

Potential Mitigations

• Even with a mature system, consulting your attorney to review the full history and corporate structure is a prudent step.
• A discussion with long-standing franchisees can provide valuable insight into the system's evolution and stability over time.
• Your business advisor can help you evaluate the brand's current market position and long-term viability despite its proven history.

Explanation

This risk was not identified in the FDD package. L&L operates in the Hawaiian barbecue restaurant sector, which is an established segment of the fast-casual food industry. With a history dating back to 1991, the business model demonstrates long-term consumer demand rather than being a temporary fad. A fad business carries the risk of declining consumer interest, which could harm your long-term investment.

Potential Mitigations

• A business advisor can help you research the long-term outlook for the fast-casual and Hawaiian food markets in your specific area.
• It is still wise to ask the franchisor about their strategies for innovation and adapting to changing consumer tastes.
• Your financial advisor can help you assess the business model's resilience to economic shifts and competitive pressures.

Explanation

This risk was not identified in the FDD package. The executive biographies in Item 2 indicate that the management team possesses extensive and long-term experience in both the restaurant industry and in franchising specifically. For example, the Co-Founder has been Chairman since 1991. Inexperienced management can be a significant risk, potentially leading to poor support and strategic errors.

Potential Mitigations

• A thorough review of the management team's background with your business advisor is always a recommended part of due diligence.
• When speaking with current franchisees, you should inquire about their direct experiences and satisfaction with the leadership team's support and direction.
• Your attorney can help you investigate the public record and reputation of the key executives.

Explanation

This risk was not identified in the FDD package. Item 1 indicates that L&L is a privately held corporation and does not appear to be owned or controlled by a private equity firm. Private equity ownership can sometimes introduce risks related to prioritizing short-term returns over the long-term health of franchisees, so its absence here is a neutral to positive factor.

Potential Mitigations

• It is always prudent to have your attorney confirm the corporate ownership structure and identify all controlling parties.
• Engage a business advisor to research the franchisor's history for any past ownership changes that might impact the current company culture.
• Asking the franchisor about their long-term vision and capital strategy can provide valuable insights.

Explanation

This risk was not identified in the FDD package. L&L does not disclose a parent company in Item 1, and the provided financial statements in Item 21 appear to be for the franchising entity itself. When a franchisor is a subsidiary, the failure to disclose parent company information can obscure the true financial strength and control structure of the system.

Potential Mitigations

• Your attorney should verify the corporate structure to confirm the absence of any undisclosed parent or controlling entities.
• An accountant should confirm that the financial statements provided are for the actual franchising entity and not an affiliate.
• Independently researching the company's corporate filings with the help of your attorney can provide additional assurance.

Explanation

This risk was not identified in the FDD package. Item 1 does not disclose any predecessor entities from which L&L acquired the business. A history with predecessors can sometimes introduce risks if the prior system had significant problems, such as high failure rates or litigation, that could carry over to the new franchisor. The absence of a disclosed predecessor simplifies this aspect of due diligence.

Potential Mitigations

• Even without disclosed predecessors, asking long-term franchisees about the history of the brand can uncover valuable information.
• Your attorney can conduct public record searches to confirm the company's history and ensure no undisclosed predecessors exist.
• A business advisor can help research the brand's origins and historical reputation in the marketplace.