Explanation

This risk was not identified in the FDD package. Rapid system expansion can strain a franchisor's ability to provide adequate support, training, and quality control to all franchisees. When a system grows too quickly, new franchisees may find that the support they were promised is diluted or unavailable, potentially harming their chances of success. Monitoring growth rates in Item 20 is crucial for assessing this risk.

Potential Mitigations

• Your business advisor can help you analyze the growth trajectory shown in Item 20 to ensure it appears sustainable.
• Speaking with franchisees who joined at different times can provide insight into whether support levels have changed as the system expanded.
• An accountant's review of the franchisor's financials can help determine if they have the capital and infrastructure to support their stated growth plans.

Explanation

This risk was not identified in the FDD package. A 'fad' business is one based on a short-lived trend, which can be a significant risk for franchisees who are locked into long-term agreements. Once public interest wanes, the business may no longer be viable, but your contractual obligations to pay royalties and other fees would continue. Evaluating the long-term consumer demand for a franchise's core product or service is a critical due diligence step.

Potential Mitigations

• Engaging a business advisor to research the long-term market trends for the industry can help validate the sustainability of the concept.
• Reviewing Item 1 for the franchisor's history and Item 11 for its commitment to research and development can provide clues about its adaptability.
• Discussing the business's resilience to economic shifts and changing trends with your financial advisor is recommended.

Explanation

This risk was not identified in the FDD package. The executive team, particularly Rudolph and Kimberly Alloy, are disclosed in Item 2 as having extensive, long-term experience in the food service and pizza industry dating back to 1977 and 1992, respectively. Their long tenure suggests they possess significant operational knowledge. Inexperienced management can be a major liability, leading to poor strategic decisions and inadequate support for franchisees.

Potential Mitigations

• It is still prudent to verify the management's reputation by speaking with current and former franchisees.
• A business advisor can help you assess how the management team's specific experience aligns with the support you will need.
• Your attorney can help you investigate if there have been any significant changes in key management personnel recently.

Explanation

This risk was not identified in the FDD package. Franchisors owned by private equity firms can sometimes prioritize short-term investor returns over the long-term health of franchisees. This can manifest as cuts in support, increases in fees, or a focus on rapid expansion without adequate infrastructure. Understanding the ownership structure in Item 1 is important because a change in ownership can significantly alter the franchisor's culture and priorities.

Potential Mitigations

• Your attorney can help you research the ownership structure of the franchisor if it is not clearly stated in Item 1.
• If private equity ownership is identified, a business advisor can help you research the firm's track record with other franchise brands.
• Speaking with franchisees who have been through an ownership change can provide valuable insight.

Explanation

This risk was not identified in the FDD package. If a franchisor is a subsidiary of a larger parent company, it is important that the parent's identity and financial information are disclosed, especially if the franchisor is newly formed or relies on the parent for financial backing or key services. Without this information, you may not have a complete picture of the financial stability and resources backing your investment.

Potential Mitigations

• Your attorney can help you verify the franchisor's corporate structure to identify any undisclosed parent companies.
• If a parent company exists and provides a guarantee, having an accountant review the parent's financial statements is crucial.
• Understanding the legal relationship and obligations between the franchisor and its parent company should be discussed with your legal counsel.

Explanation

This risk was not identified in the FDD package, as Item 1 explicitly states there are no predecessors. When a franchisor has predecessors, it is important to review their history for issues like litigation, bankruptcy, or high franchisee failure rates, as these problems could be inherited by the current franchisor. A clean slate with no predecessor history simplifies this aspect of due diligence.

Potential Mitigations

• Your attorney can still conduct public records searches to confirm the franchisor's corporate history and ensure no predecessor information has been omitted.
• Asking long-term franchisees about the history of the brand and any prior ownership structures can sometimes reveal unstated history.
• A business advisor can help you research the brand's origins and history in the marketplace.

Explanation

This risk was not identified in the FDD package. Item 3 states that there is no litigation that requires disclosure. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, is a significant red flag. It can indicate systemic problems within the franchise, an untrustworthy franchisor, or a business model that fails to meet expectations. The absence of such litigation is a positive sign.

Potential Mitigations

• Your attorney can conduct independent searches for litigation that may not have met the technical requirements for disclosure in Item 3.
• Asking current and former franchisees about any past or current disputes, even those not in court, can provide valuable context.
• A business advisor can help you understand what is considered a normal level of litigation for a franchise system of this size and age.