Explanation

The risk of high franchisee turnover was not identified in the FDD. Item 20 shows no terminations, non-renewals, or other cessations for the past three years. However, this is a very young franchise system with only four franchised outlets, so this data has limited historical meaning. High turnover can be a red flag for systemic issues, such as unprofitability or poor franchisor support, so it's a key metric to monitor in more mature systems.

Potential Mitigations

• Speaking with a representative sample of current franchisees from the list in Item 20 is a critical step your business advisor should recommend.
• During franchisee interviews, your attorney can help frame specific questions about franchisee satisfaction, profitability, and their relationship with the franchisor.
• For any franchise system, your accountant should help you develop conservative financial projections to assess the viability of your specific location.

Explanation

This risk was not identified. The franchise system is growing, but the rate of expansion disclosed in Item 20 does not appear to be overly rapid. In some systems, very fast growth can strain the franchisor's ability to provide adequate support, training, and quality control to all franchisees. Monitoring the ratio of corporate support staff to franchisees can be a useful exercise when evaluating a system's growth plans.

Potential Mitigations

• Your business advisor can help you assess the franchisor's infrastructure and capacity to support its stated growth plans.
• A discussion with your accountant about the franchisor's financial statements can help determine if they are investing sufficiently in support systems.
• Engaging with current franchisees about their perception of the quality and timeliness of franchisor support is always a prudent step.

Explanation

This risk was not identified. The franchise concept, focusing on burgers, chicken, and salads, operates in the well-established fast-casual restaurant sector and is not tied to a short-term trend. When evaluating any franchise, a key consideration for your business advisor is whether its core product or service has long-term, sustainable consumer demand, which appears to be the case here.

Potential Mitigations

• A business advisor can help you analyze the local market to assess the long-term demand and competitive landscape for this type of restaurant concept.
• Working with an accountant, you should develop financial models that consider potential shifts in consumer dining trends.
• Your attorney should review the franchise agreement for any flexibility in adapting menu offerings to future market changes.

Explanation

This risk was not identified. FDD Item 2 shows that the franchisor's management team consists of senior executives from its parent company, Texas Roadhouse, Inc., who have extensive, long-term experience in the restaurant industry. In some franchises, inexperienced management can pose a significant risk, potentially leading to poor strategic decisions and inadequate franchisee support, which is why a review of Item 2 with your business advisor is important.

Potential Mitigations

• A thorough review of the backgrounds of the key personnel listed in Item 2 with your business advisor is always a good practice.
• Discussions with current franchisees can provide insight into the quality and effectiveness of the management team's support and leadership.
• Your attorney can help you understand the long-term stability of the management team and any associated risks.

Explanation

This risk does not apply. FDD Item 1 indicates the franchisor is a subsidiary of Texas Roadhouse, Inc., a publicly traded company, not a private equity firm. Private equity ownership can sometimes introduce risks related to short-term investment horizons, which may lead to strategies focused on rapid resale rather than the long-term health of the franchise system and its franchisees.

Potential Mitigations

• It is always advisable to understand the franchisor's ownership structure and any recent changes with the help of your attorney.
• A business advisor can help you research the ownership entity's track record and investment philosophy in other ventures.
• Discussions with your accountant regarding the parent company's financial statements can reveal its long-term financial strategy and stability.

Explanation

This risk was not identified. The FDD clearly discloses in Item 1 that the franchisor is a wholly-owned subsidiary of Texas Roadhouse, Inc. Furthermore, the parent company provides a performance guarantee and includes its audited financial statements in Exhibit A-2. Proper disclosure of parent companies is critical, as their financial health and operational control can significantly impact the franchisee's success.

Potential Mitigations

• Your attorney should always verify the corporate structure disclosed in Item 1 to understand who ultimately controls the franchise system.
• When a parent company is involved, especially as a guarantor, it's crucial that your accountant reviews their financial statements thoroughly.
• Understanding the terms of any parent guarantee with your legal counsel is essential to assess the level of security it provides.

Explanation

This risk was not identified in the FDD. Item 1 does not disclose any predecessor entities from which the franchisor acquired the business. Understanding the history of any predecessors is important, as it can reveal past challenges, litigation, or turnover rates that might not be apparent from the current franchisor's recent history alone.

Potential Mitigations

• Your attorney should always review Item 1 carefully for any mention of predecessor companies.
• If a predecessor is identified, a business advisor can help you research its historical performance and reputation.
• Speaking with long-term franchisees who may have operated under a predecessor can provide valuable insights.

Explanation

This risk was not identified. FDD Item 3 discloses no litigation against the franchisor or its management that would require disclosure. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud or breach of contract, can be a major red flag indicating systemic problems. Similarly, a high volume of lawsuits initiated by the franchisor against franchisees might suggest an overly litigious or aggressive corporate culture.

Potential Mitigations

• Your attorney should always review Item 3 and any state-specific addenda regarding litigation disclosures.
• It is prudent to conduct an independent search for litigation involving the franchisor, as some disputes may not meet the threshold for disclosure.
• Asking current franchisees about their experience with disputes and the franchisor's approach to conflict resolution can be very insightful.