Explanation

The risk of high franchisee turnover was not identified, as Item 20 tables show no franchisee terminations, non-renewals, or cessations. However, the system is very new, having only started franchising in 2023, so this data has limited predictive value. In a mature system, high turnover can signal serious problems like unprofitability or franchisee dissatisfaction, increasing the risk for new investors.

Potential Mitigations

• Speaking with all current franchisees listed in Exhibit E is essential to gauge their satisfaction and future intentions.
• Your accountant can help you model different financial scenarios to understand the pressure points that could lead to business failure.
• It is wise to have your attorney review termination clauses to understand the conditions under which the relationship can end.

Explanation

This risk was not identified in the FDD package. A fad business is one tied to a fleeting trend, which can be risky as consumer interest may decline, leaving you with a potentially unviable business even though your contractual obligations continue. Evaluating the long-term, sustainable consumer demand for a franchise concept is a critical step in assessing an investment opportunity.

Potential Mitigations

• A business advisor can help you independently assess the long-term market demand for the product or service to distinguish a sustainable trend from a novelty.
• Analyzing the franchisor's plans for innovation, adaptation, and staying relevant is a prudent step.
• Working with your financial advisor to consider the business model's resilience to economic downturns and shifting consumer tastes is recommended.

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 decisions are driven by short-term profit motives to prepare for a future sale, potentially at the expense of long-term franchisee profitability and system health. These motives could lead to increased fees, reduced support, or forced use of affiliated vendors.

Potential Mitigations

• A business advisor can help you research the track record of any owning entity with other franchise systems.
• Inquiring with existing franchisees about any changes in system philosophy or support levels is a key due diligence step.
• Your attorney should review any clauses related to the sale or assignment of the franchise system.

Explanation

This risk was not identified in the FDD package. A parent company must be disclosed in Item 1. If a franchisor is a subsidiary, especially a thinly capitalized one, the parent's financial health can be critical. The FTC Rule may require the parent's financial statements to be disclosed if it guarantees the franchisor's obligations or is otherwise fundamental to the franchisee's success. The absence of such disclosures, when required, can hide significant financial risks.

Potential Mitigations

• Your attorney can help verify the franchisor's corporate structure and determine if a parent entity's financials should have been included.
• If a parent company guarantee is provided, an accountant should review the parent's financial statements with the same rigor as the franchisor's.
• Understanding the legal and financial relationship between a franchisor and its parent is a key task for your professional advisors.

Explanation

This risk was not identified, as Holy Cow discloses in Item 1 that it does not have any predecessors. When a franchisor has a predecessor, it is important to scrutinize that entity's history for issues like litigation, bankruptcy, or high franchisee turnover. Incomplete disclosure about a predecessor's troubled past could obscure inherited systemic problems that might affect your investment.

Potential Mitigations

• Your attorney should always carefully review Item 1 for any mention of predecessors and their history.
• If a predecessor exists, researching their track record through public records can provide valuable context.
• Asking long-term franchisees about their experience under any previous ownership is a critical due diligence step.

Explanation

This risk was not identified, as Item 3 states that no litigation is required to be disclosed. A pattern of lawsuits filed by franchisees alleging fraud or misrepresentation, or an unusually high number of lawsuits filed by the franchisor against its franchisees, can be a major red flag. It may indicate systemic problems with sales practices, support, or a contentious and litigious relationship between the franchisor and its operators.

Potential Mitigations

• Your attorney should always be engaged to carefully review the details of any disclosed litigation in Item 3.
• It is wise to ask current and former franchisees about their knowledge of any disputes within the system.
• A business advisor can help you evaluate whether the nature of any litigation suggests broader problems with the franchise system's health.