Explanation

The financial statements for JL Beers Franchising, Inc. (JL Beers) indicate it is profitable and financially stable. However, the notes to the financials reveal a significant revenue concentration, with a large percentage of royalty fees coming from only three franchisees. A problem with any of these few franchisees could disproportionately impact JL Beers' revenue stream, which could in turn affect its ability to support the system. Your success is partly tied to the franchisor's overall financial health.

Potential Mitigations

• Your accountant should review the franchisor's financial statements, including the notes on revenue concentration, to assess the potential impact on system stability.
• Discuss the franchisor's plans for system growth and revenue diversification with your business advisor to understand how this risk might be managed over time.
• Ask your attorney to inquire about the health and longevity of the key franchisees that represent the bulk of the revenue.

Explanation

This risk was not identified in the FDD package. High franchisee turnover, often seen in Item 20 data, can be a major red flag indicating systemic problems like unprofitability or poor franchisor support. The data for JL Beers shows a stable franchise system with no franchisee terminations, non-renewals, or closures in the past three years. This low turnover is a positive indicator for the health of the franchise system and franchisee satisfaction.

Potential Mitigations

• Even with low turnover, speaking with current franchisees listed in Item 20 about their experiences is a crucial due diligence step advised by business advisors.
• Your accountant can help you analyze the Item 20 tables to confirm the stability and calculate turnover rates for your own assessment.
• In discussions with the franchisor, your attorney might inquire about the reasons for the single company-owned store closure noted in 2022.

Explanation

This risk was not identified in the FDD package. Rapid growth can strain a franchisor's ability to provide adequate support. The JL Beers system has been stable, with no new franchises awarded in the last two years according to the financial statement notes. This suggests a measured pace rather than potentially problematic rapid expansion, which means support resources are less likely to be overstretched. This stability can be a positive sign for a prospective franchisee.

Potential Mitigations

• A business advisor can help you evaluate if the franchisor's current size and support structure are appropriate for your needs.
• It is still wise to ask the franchisor about their future growth plans to understand how the system might change.
• Your attorney can help you understand the support obligations outlined in the Franchise Agreement, regardless of system size.

Explanation

This risk was not identified. An unproven system can present higher risks due to a lack of track record. However, JL Beers and its predecessor have been in operation since 2009 and franchising since 2013. The management team has extensive experience, and the system has maintained a stable number of outlets for several years. This indicates a mature and tested business concept rather than a new or unproven one.

Potential Mitigations

• A thorough review of the management team's experience in Item 2 with your business advisor is still a valuable exercise.
• Speaking with long-term franchisees from the list in Item 20 can provide insight into the system's evolution and stability.
• Your accountant can analyze the multi-year financial data in Item 19 and 21 to confirm the historical performance of the concept.

Explanation

This risk was not identified in the FDD package. The business model, focused on hamburgers and a wide selection of craft beer, caters to a staple segment of the casual dining market rather than a niche or fleeting trend. The concept has been operating successfully since 2009, demonstrating sustained consumer demand over more than a decade. This longevity suggests the business is not a short-term fad and has established market relevance.

Potential Mitigations

• Consulting with a business advisor to analyze the long-term prospects of the craft beer and high-quality burger market in your specific area remains a prudent step.
• Discussing the franchisor's approach to menu innovation and adaptation with current franchisees can provide insight into its long-term strategy.
• Your accountant can help you evaluate the historical sales data in Item 19 to assess the consistency of demand over time.

Explanation

This risk was not identified in the FDD package. Inexperienced management can be a significant liability for a franchise system. However, Item 2 shows that the key executives at JL Beers have extensive and long-term experience with the brand, its predecessor, and affiliates, with many serving in various leadership capacities since 2009 or 2011. This depth of brand-specific and industry experience is a positive factor for system stability and support.

Potential Mitigations

• It is always a good practice to interview current franchisees about their direct experiences with the management team's responsiveness and support.
• A business advisor can help you assess how the management structure described in Item 2 might impact your day-to-day operations.
• Verifying any specific claims of experience or credentials listed in Item 2 is a part of thorough due diligence that your attorney can assist with.

Explanation

This risk was not identified. The FDD does not indicate that JL Beers is owned by a private equity firm. The management team appears to be comprised of long-term operators involved with the brand since its early stages. This suggests that operational decisions are more likely to be focused on the long-term health of the brand rather than the short-term return objectives often associated with private equity ownership.

Potential Mitigations

• A business advisor can help you research the ownership structure of the franchisor to confirm its independence.
• It is still beneficial to ask current franchisees about any recent changes in ownership or management philosophy.
• Your attorney should review the assignment clause in the Franchise Agreement to understand what happens if the franchisor is sold in the future.

Explanation

This risk was not identified. FDD Item 1 discloses the franchisor's predecessor and a key affiliate, JLBA. The franchisor's financials are provided and audited. There is no indication that a parent company exists or that its financials are required and have been withheld. The disclosure appears to present a clear picture of the corporate structure and its key related entities, providing the necessary information for a risk assessment.

Potential Mitigations

• Your attorney can review Item 1 and the corporate structure to confirm that all necessary entities have been disclosed.
• An accountant's review of the affiliate transactions in the financial statement notes is important to understand the flow of funds within the system.
• During franchisee calls, you can inquire about the role and influence of the affiliate, JLBA, on the franchise system.

Explanation

This risk was not identified in the FDD package. Item 1 clearly discloses the franchisor's predecessor. Importantly, Items 3 and 4 state there is no history of material litigation or bankruptcy for the franchisor or its predecessor. This clean legal and financial history for the predecessor entity is a positive sign and reduces the risk of inheriting unresolved historical issues.

Potential Mitigations

• Your attorney should still review the information on the predecessor in Item 1 to ensure the disclosure is complete.
• Speaking with the longest-term franchisees listed in Item 20 can provide historical context about the transition from the predecessor.
• A business advisor can help you research public records for any information about the predecessor entity as part of your due diligence.

Explanation

This risk was not identified in the FDD package, which is a positive sign. A pattern of litigation against a franchisor, especially claims of fraud or breach of contract from other franchisees, can indicate deep systemic problems. Item 3 of this FDD states that there is no litigation that requires disclosure. The absence of such legal disputes suggests a healthier relationship between the franchisor and its franchisees.

Potential Mitigations

• It is wise to have your attorney conduct an independent public records search for litigation involving the franchisor as part of due diligence.
• When speaking with current and former franchisees, you should still ask about any disputes they are aware of, even if not material enough for Item 3 disclosure.
• Understanding the dispute resolution process in Item 17 remains important, as it dictates how any future disagreements would be handled.