Explanation

This risk was not identified in the FDD package. The franchise system is shrinking, not growing at a rate that would strain its support resources. Rapid, uncontrolled growth can be a concern because it may stretch a franchisor's ability to provide adequate training, site selection assistance, and ongoing operational support to all franchisees, potentially diminishing the value of the system for everyone.

Potential Mitigations

• A business advisor can help evaluate whether a franchisor's support infrastructure is appropriate for its current size and any projected growth.
• Discussions with franchisees who have recently opened can provide insight into the quality of current support, a task your attorney can help prepare for.
• An accountant's review of the franchisor's financials can help determine if they are investing sufficiently in support systems.

Explanation

This risk was not identified in the FDD package. HDC began offering franchises in 2015 and has over nine years of operational history. A new or unproven system presents a higher risk because the business model may not be time-tested, brand recognition is likely low, and the franchisor may lack the experience to provide effective support, which can increase the chances of business failure for a new franchisee.

Potential Mitigations

• For any franchise, especially a newer one, consulting with a business advisor to scrutinize the business model and its market position is essential.
• Engaging an attorney to review the FDD is important to understand the franchisor's history and experience as disclosed in Item 1.
• Your accountant can assess the financial stability of a young franchisor to see if it is adequately capitalized for the long term.

Explanation

This risk was not identified in the FDD package. The business model is centered on donuts and coffee, a well-established food service category with long-term consumer demand. While HDC's branding is unique, the core product is not considered a short-term fad. Investing in a fad business is risky because consumer interest can decline rapidly, potentially leaving you with a failing business while still being bound by a long-term franchise agreement.

Potential Mitigations

• A business advisor can help you research market trends to differentiate between a sustainable business and a potential fad.
• Speaking with long-standing franchisees in any system can offer perspective on the brand's long-term customer appeal.
• Your financial advisor can help assess the financial resilience of a business model against changing consumer tastes.

Explanation

This risk was not identified in the FDD package. Item 2 indicates that the key executives have been with the company since its inception in 2015, showing a decade of experience in this specific business and in franchising. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, underdeveloped operational systems, and inadequate franchisee support, ultimately jeopardizing your investment.

Potential Mitigations

• For any franchise investment, it is wise to have your business advisor help you research the backgrounds of the key management team.
• Interviewing current franchisees can provide valuable firsthand accounts of the management team's competence and responsiveness.
• Your attorney can review Item 2 of the FDD to analyze the disclosed experience of the franchisor's leadership.

Explanation

This risk was not identified in the FDD package. Item 1 indicates HDC is a Missouri LLC and does not disclose any ownership by a private equity firm. Private equity ownership can be a risk because their investment strategies may prioritize short-term returns, which can sometimes lead to reduced franchisee support, increased fees, or a quick sale of the franchise system, creating uncertainty for franchisees.

Potential Mitigations

• Your attorney can help you investigate the ownership structure of any franchisor to identify if a private equity firm is involved.
• If a franchisor is PE-owned, a business advisor can help research the firm's history with other franchise brands.
• Talking to franchisees who have been through a PE acquisition can provide insight into how operations and support might change.

Explanation

This risk was not identified in the FDD package. Item 1 lists several affiliates but does not mention a parent company. Failure to disclose a parent company, especially one that guarantees the franchisor's performance or is a critical supplier, can obscure the true financial backing and stability of the franchise system. Proper disclosure rules require parent company information and sometimes their financials if they are integral to the franchisee's success.

Potential Mitigations

• Your attorney should always review Item 1 and Item 21 to ensure proper disclosure of any parent companies and their financial data if required.
• An accountant can analyze the relationship between a franchisor and its parent to assess financial dependencies.
• A business advisor can help investigate the operational role of a parent company in the franchise system.

Explanation

This risk was not identified in the FDD package. Item 1 clearly states that HDC has no predecessors. When a franchisor has a predecessor, it is important to scrutinize that entity's history, as any past issues like litigation, bankruptcy, or high franchisee failure rates could be inherited by the current franchisor and may indicate underlying problems with the business system.

Potential Mitigations

• It is crucial for your attorney to review Item 1 of any FDD to identify any disclosed predecessors.
• A business advisor can assist in researching the history of a predecessor if one is listed.
• Speaking with franchisees who have operated under both the predecessor and the current franchisor can offer valuable historical context.

Explanation

This risk was not identified in the FDD package. Item 3 states there is no litigation that requires disclosure. A pattern of litigation, especially lawsuits initiated by franchisees alleging fraud or misrepresentation, can be a major red flag. It may suggest deep-seated problems in the franchisor's operations, disclosure practices, or relationship with its franchisees. Conversely, numerous suits by the franchisor against franchisees might indicate an overly aggressive culture.

Potential Mitigations

• Having your attorney carefully review Item 3 is a critical step in any FDD analysis.
• A business advisor can help you understand whether the amount and type of litigation is normal for a system of that size and age.
• Even with no disclosed litigation, speaking with former franchisees can sometimes uncover a history of disputes that were settled before a lawsuit was filed.