Explanation

This risk was not identified in the FDD package. High franchisee turnover, revealed in Item 20, can be a major red flag indicating systemic problems such as low profitability, poor franchisor support, or an unviable business model. The data for HSF shows a small but stable or growing number of franchised outlets over the last three years with no reported terminations or cessations of operation, suggesting franchisee churn is not a significant issue at present.

Potential Mitigations

• With your business advisor, it's wise to contact several current franchisees from the list in Item 20 to discuss their satisfaction and profitability.
• An accountant can help you review the Item 20 tables to calculate the effective turnover rate for any franchise you consider.
• Your attorney should help you understand your rights and obligations if the franchise system begins to experience high turnover in the future.

Explanation

This risk was not identified in the FDD package. Rapid system growth, while sometimes positive, can strain a franchisor's ability to provide adequate support, training, and quality control to all its franchisees. The data in Item 20 indicates that HSF has been adding new franchised units at a slow and controlled pace over the last three years, suggesting that its support systems are not likely to be overstretched by excessively rapid expansion.

Potential Mitigations

• When evaluating any franchise, your accountant can help assess if the franchisor's financials in Item 21 support its rate of growth.
• A discussion with your business advisor about the franchisor's infrastructure for training and support is a valuable step.
• Inquiring with both new and established franchisees about the quality and timeliness of franchisor support provides important insight.

Explanation

HSF began franchising in 2010 and its affiliate-owned stores have operated since 1990, so the system is not new. However, with only seven franchised outlets and seven affiliate-owned outlets reported in Item 20, it is a very small system. This may limit brand recognition in new markets and means the franchisor's resources for support and marketing are likely smaller than those of larger, more established brands, which could present challenges for a new franchisee.

Potential Mitigations

• A business advisor can help you evaluate the pros and cons of joining a small versus a large franchise system.
• It is important to have your accountant perform a thorough analysis of HSF's financial capacity to support the brand.
• You should speak with current franchisees about the level of brand recognition in their markets and the effectiveness of the marketing support.

Explanation

This risk was not identified in the FDD package. The business concept, a sports-themed bar and grill, is a well-established and durable segment of the restaurant industry, not a temporary fad. This suggests a more stable underlying consumer demand. However, it also means you will face a high level of competition from other similar establishments, both independent and franchised, which is a key business challenge to consider.

Potential Mitigations

• Your business advisor can help you analyze the long-term consumer demand for the products and services in your specific market.
• An accountant should assist you in developing financial projections that account for a highly competitive market environment.
• It is wise to ask current franchisees about local market saturation and their strategies for differentiation.

Explanation

This risk was not identified in the FDD package. Item 2 shows that the key executives have extensive, long-term experience operating Hotshots-branded restaurants, with some managers having been with the affiliate companies since the 1990s. The franchising entity itself has been operating since 2010. This level of direct, hands-on experience in the specific business is a positive factor, suggesting a deep understanding of the operational model.

Potential Mitigations

• It is always prudent to review the executive backgrounds in Item 2 with a business advisor to assess their specific experience in franchising.
• Asking current franchisees about their confidence in the management team's leadership and strategic direction provides valuable perspective.
• Your attorney can help you understand the roles and responsibilities of the key personnel as described in the FDD.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD indicates that HSF is a limited liability company and does not disclose ownership by a private equity firm. This typically means that management's focus may be more aligned with the long-term health of the brand and its franchisees, rather than on meeting the short-term return-on-investment timelines that can be characteristic of private equity ownership.

Potential Mitigations

• For any franchise, your attorney can help you investigate the ownership structure to confirm who controls the company.
• It is good practice to ask the franchisor about their long-term goals and any plans for a future sale of the company.
• Talking to current franchisees can offer insight into whether they perceive the franchisor's decisions as being focused on long-term brand health.

Explanation

This risk was not identified in the FDD package. HSF clearly discloses its affiliate, 'Licensing,' which owns the trademarks. HSF itself has its own audited financial statements with positive net worth. There is no indication of a hidden parent company whose financial instability could pose a risk to the system. The ownership structure appears to be transparently disclosed in Item 1.

Potential Mitigations

• Your accountant should always review Item 1 and Item 21 to understand the full corporate structure and financial picture.
• If a franchisor is a subsidiary, your attorney can advise on whether a parent company guarantee of the franchisor's obligations is necessary.
• A business advisor can help assess the operational and financial relationships between a franchisor and its disclosed affiliates.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD does not disclose any 'predecessors,' which are prior entities from which the franchisor acquired the business. This indicates that the operational and financial history presented in the FDD belongs to the current ownership and management group, providing a more direct and clear history for you to evaluate without the complication of inherited issues from a previous owner.

Potential Mitigations

• Your attorney should always confirm the history of the business as stated in Item 1.
• If a predecessor were disclosed, it would be crucial to have your accountant and attorney review its litigation and bankruptcy history in Items 3 and 4.
• Speaking with long-term franchisees is a good way to gather information on any past ownership changes and their impact.

Explanation

This risk was not identified in the FDD package. Item 3 states that there is no litigation that is required to be disclosed. This is a positive sign, as a pattern of lawsuits filed by franchisees against a franchisor alleging fraud, misrepresentation, or breach of contract can indicate serious systemic problems. The absence of such litigation suggests a more stable and less contentious relationship between HSF and its current franchisees.

Potential Mitigations

• Your attorney should always review Item 3 carefully for any disclosed litigation and explain its potential significance.
• A business advisor can help you perform independent online searches for any news or reports of disputes involving the franchisor.
• Asking franchisees about their relationship with the franchisor and any disputes they are aware of is a key part of due diligence.