Explanation

This risk was not identified. The FDD is for a new franchise system with no reported franchisee terminations, non-renewals, or cessations of operation. High turnover in an established system can be a major red flag, often indicating issues with profitability, franchisor support, or the business model itself. A prospective franchisee should always analyze the tables in Item 20 for such trends, particularly the 'Transfers' and 'Ceased Operations' columns, as this may reveal underlying problems.

Potential Mitigations

• With your business advisor, it's wise to contact a broad sample of current and former franchisees from the list in Item 20 to discuss their experiences.
• Analyzing the reasons for any franchisee departures with your attorney can provide insight into the health of the system.
• Have your accountant calculate the effective turnover rate over three years to identify any concerning trends.

Explanation

This specific risk was not identified, as the fast-casual restaurant concept serving Hawaiian plate lunches appears to be based on an established food category rather than a short-term trend. However, you should always consider the long-term consumer demand for any specialized business concept. A business tied to a fad could face declining sales once public interest wanes, even though your contractual obligations to the franchisor would continue.

Potential Mitigations

• A business advisor can help you research the target market and long-term consumer trends for this specific cuisine in your area.
• Investigate the brand's plans for menu innovation and concept evolution to ensure it can adapt to changing consumer tastes.
• Developing a business plan with your accountant that models scenarios for both high and declining consumer interest is a prudent step.

Explanation

This risk does not appear to be present. The management team detailed in Item 2 includes individuals with specific and extensive prior experience in franchise development and operations for major brands like McDonald's and Jack in the Box. This suggests the franchisor has invested in leadership familiar with supporting a franchise system. For any franchise, it is crucial that the management team has a blend of industry and franchising expertise.

Potential Mitigations

• It is still advisable to have your business advisor research the backgrounds and reputations of the key executives listed in Item 2.
• When speaking with current franchisees, ask about their direct experiences with the management team's accessibility and effectiveness.
• Your attorney can help you understand the roles and responsibilities of the management personnel as described in the FDD.

Explanation

This risk was not identified, as Item 1 does not disclose ownership by a private equity firm. When a PE firm owns a franchisor, there can be a risk that its focus on short-term returns may not align with the long-term health of franchisees. This can sometimes lead to increased fees, reduced support, or a quick sale of the system, creating uncertainty for franchisees.

Potential Mitigations

• If you were considering a PE-owned franchise, your business advisor could help research the firm's history with other franchise brands.
• An attorney could analyze the transferability of the franchise agreement to understand what happens if the franchisor is sold.
• Speaking with franchisees who have been through a sale of their franchise system can provide valuable firsthand accounts.

Explanation

This risk is not present, as the franchisor discloses in Item 1 that it has no predecessors. In cases where a franchisor has acquired the system from a previous entity, it is important to scrutinize the predecessor's history for any signs of trouble, such as litigation, bankruptcy, or high franchisee failure rates, as these issues could be inherited by the new franchisor.

Potential Mitigations

• When a predecessor exists, your attorney should carefully review Items 1, 3, and 4 for any disclosed history.
• A business advisor can assist in researching the predecessor's public reputation and past performance.
• Talking to long-term franchisees who operated under the predecessor provides invaluable insight.

Explanation

This risk was not identified, as the franchisor reports no disclosable litigation in Item 3. A pattern of lawsuits filed by franchisees alleging fraud or misrepresentation, or a high number of suits filed by the franchisor against franchisees, can be a significant red flag. It may indicate systemic problems with the franchisor's business practices, disclosure integrity, or its relationship with franchisees.

Potential Mitigations

• A thorough review of Item 3 with your franchise attorney is always a critical step in due diligence.
• Your attorney can conduct public records searches to see if any litigation exists that was not required to be disclosed.
• Discussing any disclosed litigation with the franchisees involved can provide crucial context.