Explanation

This risk was not identified in the FDD package. Item 20 data does not show a high rate of franchisee terminations, non-renewals, or other cessations. High turnover can be a red flag for systemic issues, such as lack of profitability or poor franchisor support. Careful analysis of this data is a critical part of franchisee due diligence to gauge the health of the franchise system and the potential for success.

Potential Mitigations

• An accountant should help you analyze the tables in Item 20 to calculate the effective annual turnover rate.
• Discussing the information in Item 20 with a franchise attorney can help you understand the potential reasons for franchisee departures.
• Speaking with former franchisees listed in the FDD is a crucial step your business advisor can help you prepare for.

Explanation

This risk was not identified in the FDD package. Item 20 data shows a new and small system, so growth is not yet 'rapid' in a way that would typically strain an established franchisor's resources. However, rapid growth can sometimes outpace a franchisor's ability to provide adequate training, site selection assistance, and ongoing operational support. This can lead to a decline in service quality and franchisee satisfaction across the system.

Potential Mitigations

• A discussion with a business advisor about the franchisor's growth plans can help gauge if their support infrastructure is prepared to scale.
• Ask current franchisees about their experiences with the quality and timeliness of franchisor support.
• An accountant can review the franchisor's financial statements to assess if they are allocating sufficient resources to support growth.

Explanation

This risk was not identified in the FDD package. The business is based on a popular and established food category (Korean street food). Fad businesses are tied to fleeting trends and can face a sharp decline in consumer interest, leaving you with a long-term contract for a business with diminished demand. Evaluating a concept's long-term market appeal is a key piece of due diligence.

Potential Mitigations

• A business advisor can help you conduct market research to assess the long-term consumer demand for the products and services offered.
• It is wise to evaluate the franchisor's plans for menu innovation and concept evolution to stay relevant beyond current trends.
• Consulting with your financial advisor can help determine if the business model is resilient enough to withstand shifting consumer tastes.

Explanation

This risk was not identified in the FDD package. Item 1 indicates the company is owned by an individual, not a private equity firm. When a franchisor is owned by a private equity firm, there may be a focus on short-term profitability and a quick exit strategy. This can sometimes lead to decisions that benefit investors over the long-term health of franchisees, such as cutting support services or increasing fees.

Potential Mitigations

• Your attorney can help you investigate the ownership structure of the franchisor for any private equity involvement.
• If PE ownership is found, a business advisor can help research the firm's track record with other franchise systems.
• It is wise to discuss any changes in the franchise system since a PE acquisition with current franchisees.

Explanation

This risk was not identified in the FDD package. The franchisor discloses its key affiliate and parent company, Jawsfood Co., Ltd. in Item 1. Failing to disclose a parent company, especially one that guarantees the franchisor's obligations or is a critical supplier, is a significant issue. Full transparency about the entire corporate structure is necessary for you to assess the complete financial picture and potential risks associated with affiliates or parent entities.

Potential Mitigations

• Your attorney should verify the corporate structure and ensure that all relevant parent and affiliate entities are properly disclosed.
• An accountant should confirm if parent company financial statements are required and, if so, review them carefully.
• A business advisor can help you understand the operational relationships between the franchisor and its parent or affiliates.

Explanation

This risk was not identified in the FDD package, as JFC has no predecessors. A predecessor is a company from which the franchisor acquired the business concept. It is important to review the history of any predecessors for issues like litigation, bankruptcy, or high franchisee turnover, as these problems could be inherited by the current franchisor and affect the health of the system you are joining.

Potential Mitigations

• Your attorney should carefully review Item 1 of the FDD to identify any disclosed predecessors.
• A business advisor can assist you in researching the history and reputation of any predecessor entities.
• It is important to ask long-term franchisees about their experiences under any previous ownership.

Explanation

This risk was not identified in the FDD package. Item 3 discloses no material litigation involving the franchisor. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may indicate systemic problems within the franchise, an unhealthy relationship between the franchisor and its franchisees, or issues with the business model itself.

Potential Mitigations

• A franchise attorney can help you analyze any disclosed litigation in Item 3 to understand the nature and potential impact of the claims.
• Independent research on disclosed cases can provide additional context, a task your attorney can assist with.
• A high number of lawsuits initiated by the franchisor against franchisees should be discussed with a business advisor as it may signal an overly aggressive culture.