Explanation

While not a brand-new startup, the franchise system is still relatively young, having commenced franchising in June 2018. The brand may have limited recognition in many markets, and its systems and support structures may not be as mature or proven as those of more established franchise systems. This could present challenges in market penetration and operational efficiency for a new franchisee.

Potential Mitigations

• Your business advisor can help you assess the brand recognition and competitive landscape in your specific local market.
• Contacting a number of existing franchisees to inquire about the maturity and effectiveness of the franchisor's systems and support is advisable.
• A thorough review of the franchisor's growth and franchisee success rates with your accountant can help gauge the system's trajectory.

Explanation

This specific risk was not identified in the FDD package. Management experience is a crucial factor, as an inexperienced team may struggle with providing adequate support, managing growth, and making sound strategic decisions for the franchise system. This can negatively impact franchisee success.

Potential Mitigations

• It is still wise to have your business advisor research the backgrounds of the key executives listed in Item 2 for relevant industry and franchising experience.
• A discussion with current franchisees about their perception of management's competence and support is a valuable due diligence step.
• Your attorney can help you understand the management team's history as disclosed in the FDD.

Explanation

This risk was not identified in the FDD package. Private equity ownership can sometimes signal a focus on short-term profits over the long-term health of franchisees, potentially leading to increased fees, reduced support, or a quick sale of the franchise system.

Potential Mitigations

• If you were considering a franchise owned by a private equity firm, a business advisor could help research the firm's history with other franchise brands.
• It's a good practice to ask your attorney to review any clauses in the franchise agreement that pertain to the sale or assignment of the franchise system.
• In any franchise review, you should ask existing franchisees about any recent changes in ownership and the impact on their business.

Explanation

This risk was not identified in the FDD package. When a franchisor is a subsidiary, the financial health of its parent company can be critical. If the parent's financials are not disclosed when required, it can hide financial instability or a lack of resources, creating a significant risk for the franchisee who depends on the overall health of the entire organization.

Potential Mitigations

• Your attorney should always verify the franchisor's corporate structure as disclosed in Item 1 to identify any parent companies.
• If a parent company exists and provides guarantees, your accountant should confirm that the parent's financial statements are included and properly audited.
• A business advisor can help investigate the reputation and stability of any parent company involved in a franchise system.

Explanation

This risk was not identified in the FDD package. Item 1 clearly states that the franchisor has no predecessors. A history of predecessors could indicate instability or a pattern of rebranding to escape a negative reputation, which would be a concern for prospective franchisees.

Potential Mitigations

• It is always good practice to have your attorney review Item 1 carefully for any mention of predecessors or asset acquisitions.
• A business advisor can help you research the history of the brand online to look for any prior names or ownership structures.
• Asking long-term franchisees about the history of the brand and any previous ownership can provide valuable context.

Explanation

This risk was not identified in the FDD package. Item 3 discloses that there is no litigation required to be reported. A pattern of litigation, particularly lawsuits brought by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems within a franchise.

Potential Mitigations

• A franchise attorney should always be engaged to carefully review the nature, volume, and outcomes of any litigation disclosed in Item 3.
• Even with no disclosed litigation, speaking with former franchisees can sometimes uncover past disputes that did not result in formal lawsuits.
• Your business advisor can help you search public records for any litigation involving the franchisor that may not have been disclosed.