Explanation

This risk was not identified in the FDD package. The audited financial statements for Honest Hospitality Group LLC (Honest Hospitality) show a profitable company with positive net worth and strong cash flow. Strong franchisor financials are important as they suggest the company has the resources to support its franchisees and grow the brand, though large cash distributions to owners are noted.

Potential Mitigations

• Having an accountant review the franchisor’s financial statements, including all footnotes and cash flow trends, is a crucial step in due diligence.
• A business advisor can help you compare the franchisor’s financial performance against industry benchmarks.
• Your accountant can help you assess whether the franchisor's financial health is dependent on franchise sales versus ongoing royalties.

Explanation

This risk was not identified. Item 20 data shows steady, but not excessively rapid, growth. The franchisor's financial statements in Item 21 appear healthy, suggesting they have the resources to support current growth. Uncontrolled growth can strain a franchisor's ability to provide adequate support, so it is a key area for a prospective franchisee to watch.

Potential Mitigations

• Question the franchisor directly about its capacity and plans for scaling support infrastructure to match unit growth.
• Interviewing a broad range of existing franchisees about the current quality and responsiveness of franchisor support is a valuable exercise.
• Your accountant should review the franchisor's financials to assess if they have the resources to support continued growth.

Explanation

This risk was not identified. Honest Hospitality was formed in 2016 and began franchising the same year, giving it several years of operating history. Item 20 shows a system of over 30 units, and Item 21 financials appear stable. Investing in a new or unproven system carries higher risks, as the business model and support infrastructure may not be fully developed or validated in the marketplace.

Potential Mitigations

• A business advisor can help you conduct extensive due diligence on the founders' and management's experience in both the industry and in franchising.
• Speaking to the earliest franchisees about their experiences is a vital step in your research process.
• An accountant should assess the franchisor's capitalization and financial stability, which is particularly important for newer systems.

Explanation

This risk was not identified. The business concept, Indian street food, is a well-established cuisine category. While specific concepts can be trendy, the underlying food service model does not appear to be based on a short-term fad. Investing in a fad business is risky because consumer interest can decline rapidly, potentially leaving you with a failing business and long-term contractual obligations.

Potential Mitigations

• Independently assess the long-term market demand for the product and service with your business advisor.
• Evaluate the franchisor's plans for innovation, adaptation, and staying relevant as disclosed in Item 11.
• Consider the sustainability of the business model beyond current trends with your financial advisor.

Explanation

This risk was not identified. Item 2 indicates that the key executives have been with the franchisor since 2016 and have extensive prior experience in related businesses in the restaurant industry. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, weak systems, and inadequate franchisee support, even with the best intentions.

Potential Mitigations

• A thorough vetting of the management team's background and relevant experience is recommended, a task your business advisor can assist with.
• It is always wise to speak with existing franchisees about the quality of support and management's responsiveness.
• Assessing whether a franchisor has engaged experienced franchise consultants or staff can provide insight if they are new to franchising.

Explanation

This risk is not present in the FDD package. Item 1 does not indicate ownership by a private equity firm. This type of ownership can sometimes lead to decisions that prioritize short-term investor returns, potentially at the expense of the long-term health of the franchise system and individual franchisee profitability, so its absence is a positive indicator.

Potential Mitigations

• Researching a private equity firm's track record with other franchise systems is a valuable due diligence step.
• Talking to franchisees about changes in support or fees since any potential acquisition can provide critical insight.
• Your attorney can help assess any restrictions on the franchisor's right to sell the system and the implications for you.

Explanation

This risk was not identified. The FDD discloses affiliates, such as The Honest Reveira and Honest International Foods Private Limited, in Item 1. The franchisor's financials are provided in Item 21. Failure to disclose a parent company or provide its financial statements when required can obscure the true financial backing and stability of the franchise system.

Potential Mitigations

• An attorney can help verify the corporate structure if there is suspicion of an undisclosed controlling parent company.
• If a parent company provides guarantees or is a key supplier, your attorney should ensure its financials are provided and reviewed if required by law.
• Your accountant should confirm that any provided parent financials meet standard accounting and audit requirements.

Explanation

This risk was not identified in the FDD package. Honest Hospitality does not list any predecessors in Item 1, and Items 3 and 4 disclose no relevant litigation or bankruptcy history involving predecessors. Inadequate disclosure of a predecessor's history can hide systemic problems, such as high failure rates or legal disputes, that may have been inherited by the current franchisor.

Potential Mitigations

• An attorney should always carefully review any predecessor information disclosed in Items 1, 3, and 4 of the FDD.
• If a system was acquired from a predecessor, independent research into the predecessor's track record can provide valuable context.
• Speaking with long-term franchisees about their experience under any predecessors can reveal important historical issues.

Explanation

This risk was not identified. Item 3 of the FDD states there is no litigation that requires disclosure. A pattern of franchisee-initiated lawsuits alleging fraud or misrepresentation, or a high number of franchisor-initiated suits against franchisees, can be a significant red flag indicating systemic problems with the franchisor's practices or the viability of the franchise relationship.

Potential Mitigations

• Your attorney should carefully review the details of any litigation disclosed in Item 3.
• It can be beneficial to conduct independent legal research on disclosed cases for additional context, with assistance from your attorney.
• A pattern of fraud claims or an unusually high volume of litigation should be treated as a major warning sign.