Explanation

This risk was not identified in the FDD package. Franchisee turnover, disclosed in Item 20, is a key indicator of system health. High rates of terminations, non-renewals, or stores ceasing operation can signal widespread problems such as franchisee unprofitability, inadequate support, or a flawed business model. Analyzing this data over three years is crucial for due diligence. The system is too new to have meaningful turnover data.

Potential Mitigations

• An accountant can help you analyze Item 20 data trends over the three years provided in future FDDs to calculate the true turnover rate.
• Engaging a business advisor to compare the system’s turnover rate against industry benchmarks provides critical context.
• Your attorney can help you frame questions for former franchisees to understand why they left the system.

Explanation

This risk was not identified in the FDD package. A 'fad' business is one tied to a short-lived trend, which can threaten long-term viability. Once public interest wanes, your business could fail, but your contractual obligations, like royalty payments and a long-term lease, would remain. Assessing whether a concept has sustainable, long-term consumer demand versus being a novelty is a key part of due diligence. H&H Bagels has a long operating history since 1972.

Potential Mitigations

• Assessing the long-term market trends for the core products with a business advisor is a prudent step.
• An accountant can help you model the financial impact of potential shifts in consumer demand over the life of the franchise agreement.
• Your attorney should review the franchisor’s obligations to innovate and adapt the system to market changes.

Explanation

This risk was not identified in the FDD package. The executive team described in Item 2 appears to have relevant experience in the restaurant and hospitality industry. When a franchisor's management lacks significant experience in franchising or their specific industry, it can lead to critical errors in strategy, support, and operations. This may result in underdeveloped systems, inadequate training, and a higher risk of failure for franchisees who rely on their guidance.

Potential Mitigations

• A thorough review of the management team's background in both franchising and the specific industry with your business advisor is recommended.
• Speaking with current franchisees about their direct experiences with the management team's competence and support is valuable.
• An accountant can analyze if the franchisor has invested in experienced franchise consultants or staff to supplement any gaps in leadership experience.

Explanation

This risk was not identified in the FDD package. The franchisor, H&H Bagels, is a wholly-owned subsidiary of H&H Bagels Group, Inc., but there is no indication this parent is a private equity firm. When a franchisor is owned by a private equity firm, there may be a focus on short-term returns, which can sometimes lead to decisions that benefit investors over the long-term health of franchisees, such as cutting support or increasing fees.

Potential Mitigations

• Researching the ownership structure and the parent company's history with other franchise brands is a task for your business advisor.
• An attorney can help you understand the implications of the 'Assignment' clause, which governs the sale of the franchise system.
• Inquiring with existing franchisees about any changes in operations or support since a potential ownership change can provide valuable insight.

Explanation

This risk was not identified in the FDD package. The franchisor, H&H Bagels Franchising LLC, was formed in 2021 and states it has no predecessors. A predecessor is a prior entity from which the franchisor acquired the business. Failing to disclose or providing incomplete history about a predecessor can hide important information about past bankruptcies, litigation, or system failures, preventing you from seeing the true track record of the business concept.

Potential Mitigations

• Your attorney should confirm the corporate history and verify the 'no predecessor' claim if there are any doubts.
• A business advisor can help you research the brand's history online for any news or information related to prior ownership structures.
• Asking long-tenured employees or contacts in the industry about the brand's history can sometimes reveal undisclosed information.

Explanation

This risk was not identified in the FDD package. Item 3 discloses no litigation required to be reported. A pattern of litigation, especially lawsuits initiated by franchisees alleging fraud, misrepresentation, or breach of contract, is a significant red flag. It can indicate systemic problems with the franchisor’s sales process, business model, or franchisee relationships. Similarly, a high number of lawsuits initiated by the franchisor against franchisees may suggest an overly aggressive or unsupportive culture.

Potential Mitigations

• It is wise to have your attorney review the details of any disclosed litigation to understand the nature and potential implications of the claims.
• A business advisor can help you assess whether the number and type of lawsuits are typical for a franchise system of its size and age.
• Independent online searches for news articles or court records related to the franchisor can sometimes provide additional context for your attorney to review.