Explanation

This risk was not identified in the FDD package. The data in Item 20 shows that the franchise system is shrinking, not undergoing rapid growth that could strain its support systems. A franchisor expanding too quickly may lack the infrastructure and personnel to adequately train and support new franchisees, which can negatively impact the entire system's performance and brand reputation. Careful analysis of growth relative to support capabilities is always important.

Potential Mitigations

• Understanding a franchisor's strategic growth plan is a key discussion point to have with your business advisor.
• Inquiring with existing franchisees about the quality and timeliness of support can provide insight into whether the franchisor is keeping pace with its system size.
• Your accountant can help assess if the franchisor's financial resources, as shown in Item 21, are sufficient to support its current and planned number of outlets.

Explanation

This risk was not identified. The franchise offers submarine sandwiches, which is a well-established and long-standing segment of the quick-service restaurant industry. The business model does not appear to be based on a new or fleeting trend. A fad-based business carries the risk that consumer interest could decline quickly, potentially leaving you with a failing business and long-term contractual obligations to the franchisor.

Potential Mitigations

• Working with a business advisor to research the long-term market demand for any franchise concept's core products or services is a crucial due diligence step.
• It is wise to evaluate a franchisor's commitment to research and development to see how they plan to adapt to changing consumer tastes.
• Your accountant can help you model the financial resilience of a business in the face of potential market shifts.

Explanation

This risk was not identified in the FDD. Item 2 indicates that the key executives of FSF have prior experience in relevant large-scale businesses, including foodservice distribution and major service corporations. Inexperienced management can be a significant risk, as it may lead to weak operational systems, inadequate franchisee support, and poor strategic decisions, even with a strong brand concept. This does not appear to be a concern here.

Potential Mitigations

• It is always a prudent step to have a business advisor help you research the backgrounds of the franchisor's key management team.
• Speaking with current franchisees is an effective way to gauge the competence and effectiveness of the franchisor's leadership.
• Your attorney can help you understand the protections and obligations outlined in the franchise agreement, regardless of management's experience.

Explanation

This risk was not identified in the FDD. Item 1 indicates the franchisor is a privately held corporation and does not mention ownership by a private equity firm. Private equity ownership can sometimes lead to a focus on short-term profitability and rapid growth to prepare for a future sale of the company, which may not always align with the long-term health of franchisees.

Potential Mitigations

• If a franchisor is owned by a private equity firm, a business advisor can help you research the firm's history with other franchise brands.
• It is important to understand the potential for management changes or shifts in strategy by discussing the ownership structure with your attorney.
• Interviewing existing franchisees can reveal any changes in support or fees since an acquisition by a private equity firm.

Explanation

This risk was not identified. Item 1 of the FDD describes the franchisor and its affiliate but does not indicate the existence of a parent company whose financials would be material to your investment decision. In some cases, a franchisor may be a thinly capitalized subsidiary, making the financial health of its parent company a critical but potentially undisclosed piece of information.

Potential Mitigations

• Your attorney should review the corporate structure disclosed in Item 1 to identify any parent companies or guarantors.
• If a parent company exists and guarantees the franchisor's performance, an accountant should review the parent's financial statements.
• Understanding the full corporate structure helps assess where the ultimate financial responsibility and control lies; a business advisor can assist with this.

Explanation

This risk was not identified. Item 3 of the FDD states that there is no litigation required to be disclosed. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag about the franchisor's practices and the health of the system. The absence of such litigation is a positive indicator.

Potential Mitigations

• Even with no disclosed litigation, your attorney can conduct public record searches to see if any other legal disputes exist.
• It is still wise to ask current and former franchisees about their experiences and whether they have had disputes with the franchisor.
• A business advisor can help you assess the overall health of franchisor-franchisee relationships within the system.