Kahala Coffee Traders
Initial Investment Range
$88,400 to $516,500
Franchise Fee
$11,800 to $56,300
As a franchisee, you will operate a restaurant called Kahala Coffee Traders preparing, specializing in, and serving a variety of hot, cold, and iced beverages including coffee, espresso and tea.
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Kahala Coffee Traders March 28, 2025 FDD Risk Analysis
Free FDD Library AI Analysis Date: July 16, 2025
DISCLAIMER: Not Legal Advice - For Informational Purposes Only. Consult With Qualified Franchise Professionals.
Franchisor Stability Risks
Start HereDisclosure of Franchisor's Financial Instability
High Risk
Explanation
The financial statements for the parent guarantor, MTY Franchising USA, Inc., show a net loss of over $12.5 million for the fiscal year ended November 30, 2024, a significant reversal from a net income of nearly $17 million the prior year. This decline in profitability and decrease in total equity could impact the resources available to support the franchise system, including this brand, and its ability to invest in growth and innovation.
Potential Mitigations
- A thorough review of the parent company's complete audited financial statements with your accountant is essential to assess its overall stability.
- Discussing the reasons for the recent net loss and the company's strategy for returning to profitability with your financial advisor can provide crucial context.
- Your attorney should confirm the enforceability and financial backing of the Performance Guaranty provided in Exhibit W.
High Franchisee Turnover
High Risk
Explanation
The franchise system is very small and has experienced significant churn. Item 20 data shows that out of only 5 franchised outlets at the start of 2022, two (40% of the base) ceased operations during that year. Another unit ceased operations in 2024. This extremely high rate of outlets ceasing to do business is a critical red flag, suggesting potential systemic issues with profitability, franchisee satisfaction, or the viability of the business model.
Potential Mitigations
- It is critical to contact the former franchisees listed in Item 20 to understand why their outlets ceased operations.
- An analysis of the turnover data with your franchise attorney and accountant is necessary to evaluate the stability of this very small system.
- A business advisor can help you assess whether the potential rewards of this franchise justify the risks indicated by the high turnover rate.
Rapid System Growth
Low Risk
Explanation
This specific risk was not identified in the FDD Package. The system has been shrinking or stagnant rather than growing rapidly. Rapid growth can strain a franchisor's ability to provide adequate support, training, and quality control to its new and existing franchisees, potentially diluting the brand's value and leaving you without necessary assistance during critical phases.
Potential Mitigations
- Engaging a business advisor to review the franchisor’s growth plans against their support infrastructure is a prudent step.
- An accountant should analyze the franchisor's financial statements to determine if they have allocated sufficient capital to support their projected growth.
- Your attorney can help you understand the franchisor's contractual obligations for support, regardless of system size.
New/Unproven Franchise System
High Risk
Explanation
While Kahala Franchising, L.L.C. (Kahala) began franchising this concept in 2011, the system remains extremely small, with only five franchised units and one licensed unit as of November 2024. A small system may lack significant brand recognition, established operational efficiencies, and proven market staying power. You face the risks associated with an emerging brand, such as being a test case for new strategies or potential neglect within a massive parent company's portfolio.
Potential Mitigations
- Speaking with all current and former franchisees is critical to understand the realities of operating within this small system.
- A business advisor can help you assess the brand's market position and growth potential relative to its more established competitors.
- Your attorney should investigate if there are any additional protections that can be negotiated to offset the risks of an unproven system.
Possible Fad Business
Low Risk
Explanation
The risk of the business being a short-term fad was not identified. The coffee shop industry is a mature and established market sector with a long history of consumer demand. While specific trends within the industry may change, the core business of selling coffee and related food items is not generally considered a fad, which reduces the risk of the entire concept becoming obsolete quickly.
Potential Mitigations
- A business advisor can help you analyze long-term consumer trends in the coffee and cafe industry to validate the concept's staying power.
- Reviewing the franchisor's plans for menu innovation and adaptation with your business advisor can offer insight into their strategy for staying current.
- An accountant should assist in creating financial projections that account for the highly competitive nature of this mature market.
Inexperienced Management
Low Risk
Explanation
This specific risk was not identified in the FDD Package. Item 2 shows that the key executives have extensive and long-term experience within Kahala Brands, MTY Food Group, and other large franchise systems. This level of experience in both the food service industry and franchise management suggests that the leadership team possesses the skills necessary to manage a franchise system, which is a positive factor for prospective franchisees.
Potential Mitigations
- It is still advisable to research the public reputation and track record of the executives listed in Item 2 with the help of your business advisor.
- When speaking with franchisees, asking about their direct experiences with the management team's support and strategic direction is beneficial.
- Your attorney can verify that the experience disclosed aligns with the support obligations promised in the Franchise Agreement.
Private Equity Ownership
Medium Risk
Explanation
The ultimate parent company, MTY Food Group, Inc., is a publicly-traded entity that owns a vast portfolio of over 55 restaurant brands. This structure presents a risk that decisions may prioritize short-term shareholder value over the long-term health of a very small brand like Kahala Coffee Traders. The franchisor also retains the right to sell the system at any time without your consent, potentially to a new owner with different priorities or capabilities.
Potential Mitigations
- A business advisor can help you research the parent company's history of managing and supporting its smaller or acquired brands.
- Discuss the franchisor’s long-term commitment to this specific brand with existing franchisees and your business advisor.
- Your attorney should review the assignment clause in the Franchise Agreement to fully understand your rights, or lack thereof, if the system is sold.
Non-Disclosure of Parent Company
Low Risk
Explanation
This specific risk was not identified in the FDD Package. Item 1 clearly identifies the complex structure of parent and affiliated companies. Further, Item 21 provides the audited financial statements of the parent guarantor, MTY Franchising USA, Inc., and Exhibit W contains the Performance Guaranty from this entity. This level of disclosure appears to meet the requirements for providing insight into the financial backing of the direct franchisor.
Potential Mitigations
- Your accountant should always confirm that the financials provided are for the correct parent or guarantor entity and meet all disclosure rules.
- It is prudent for your attorney to verify the legal relationship between the franchisor, parent, and guarantor entities.
- A financial advisor can help assess the substance and strength of any performance guarantee offered by a parent company.
Predecessor History Issues
Low Risk
Explanation
This risk was not identified as being inadequately disclosed. Item 1 mentions predecessor franchisors such as Kahala Franchise Corp. and others for various brands now under the MTY umbrella. Items 3 and 4 provide extensive history on litigation and administrative actions involving these predecessors and affiliates. While the history itself is a risk, the disclosure of this history appears to be present.
Potential Mitigations
- A careful review of all predecessor information with your attorney is crucial to understanding the historical context and potential inherited issues of the system.
- Your business advisor can assist in researching the public reputation of any named predecessor entities.
- Posing questions to long-term franchisees about their experience under previous ownership can provide valuable insights.
Pattern of Litigation
High Risk
Explanation
Item 3 discloses a significant history of litigation involving the franchisor, its affiliates, and predecessors. These cases include numerous franchisee-initiated lawsuits alleging misrepresentation, fraud, and violations of state franchise laws. Several of these actions resulted in the franchisor or its affiliates paying substantial settlements or arbitration awards to franchisees. This pattern suggests a potential for systemic issues in sales practices, disclosure, or franchisee relations, representing a very high risk for a prospective franchisee.
Potential Mitigations
- A thorough review of every case summary in Item 3 with your franchise attorney is absolutely essential.
- Your attorney should advise on the serious implications of a pattern of fraud and misrepresentation claims within a franchise system.
- You should consider this litigation history a major red flag and discuss its weight heavily with your business and legal advisors before proceeding.
Disclosure & Representation Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
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Financial & Fee Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
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Legal & Contract Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
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Territory & Competition Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
Unlock Full Risk Analysis
Purchase the complete risk review to see all 102 risks across all 10 categories.
Regulatory & Compliance Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
Unlock Full Risk Analysis
Purchase the complete risk review to see all 102 risks across all 10 categories.
Franchisor Support Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
Unlock Full Risk Analysis
Purchase the complete risk review to see all 102 risks across all 10 categories.
Operational Control Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
Unlock Full Risk Analysis
Purchase the complete risk review to see all 102 risks across all 10 categories.
Term & Exit Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
Unlock Full Risk Analysis
Purchase the complete risk review to see all 102 risks across all 10 categories.
Miscellaneous Risks
Example Risk: Franchisee Financial Obligations
Blue Risk
Explanation
This risk involves the financial obligations that a franchisee must meet, including initial fees, ongoing royalties, and other required payments. Understanding these obligations is crucial for long-term success.
Potential Mitigations
- Carefully review the Franchise Disclosure Document (FDD) and consult with a franchise attorney to fully understand all financial commitments before signing.
- Conduct regular risk assessments
- Implement monitoring and reporting systems
Unlock Full Risk Analysis
Purchase the complete risk review to see all 102 risks across all 10 categories.
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