Explanation

The franchisee turnover rate appears to be low. Over the last three years, the number of franchises that were terminated, not renewed, or ceased operating for other reasons is a small percentage of the total number of units in this large system. For example, in 2024, 36 units ceased operations out of a starting base of 1,670. While any closure is notable, this data does not suggest a systemic problem with franchisee failure or dissatisfaction.

Potential Mitigations

• Discussing the reasons for franchisee departures with the franchisor can provide valuable context for the Item 20 data.
• Contacting a sample of former franchisees from the list in Exhibit F is a crucial step to verify the reasons they left the system.
• Your business advisor can help you compare these turnover rates against industry averages to confirm they are within a normal range.

Explanation

The risk of excessively rapid growth straining franchisor resources was not identified. While the system has grown steadily over the past three years, adding over 100 units each year, its established history since 2008 and large size suggest it likely has the infrastructure to manage this expansion. The growth rate does not appear to be so explosive as to inherently risk a collapse in support services for a system of this maturity and scale.

Potential Mitigations

• Inquiring about the franchisor's support staff-to-franchisee ratio with a business advisor can help evaluate their capacity for continued growth.
• Posing questions to a range of new and established franchisees about the current quality and responsiveness of franchisor support is a valuable exercise.
• A review of the franchisor’s investment in support infrastructure with your accountant can offer insights into their long-term commitment.

Explanation

This risk was not identified in the FDD package. Kona Ice, Inc. (KII) has been franchising since 2008 and operating similar businesses since 2007, indicating it is an established system, not a new or unproven one. The FDD does not suggest the business is a startup, and it has a long operational history with a large number of franchisees. Therefore, the risks associated with an unproven concept or a new franchisor are not applicable here.

Potential Mitigations

• Even with a mature system, it is prudent to have your attorney review the franchisor's history as described in Item 1.
• A business advisor can help you analyze the long-term viability and market position of an established brand.
• Speaking with long-tenured franchisees can provide insight into the system's evolution and stability over time.

Explanation

This risk was not identified in the FDD package. The business model, which involves selling shaved ice and related treats from a mobile truck, has been in operation since 2007. This long history and the brand's large national presence suggest a sustained consumer demand that is not dependent on a short-term fad. The core product is a classic treat, reducing the risk that your business's success is tied to a fleeting trend.

Potential Mitigations

• A business advisor can help you assess the long-term market demand for the products in your specific local area.
• Discuss the franchisor's history of product innovation and adaptation with current franchisees to understand how they stay relevant.
• Researching local competition and consumer trends for similar dessert concepts would be a valuable exercise for your business plan.

Explanation

This risk was not identified in the FDD package. Item 2 shows that the key executives, particularly the CEO, have been with the company since its inception in 2008. This long tenure indicates significant experience in both the specific business of mobile shaved ice and in managing this large franchise system. The risks associated with an inexperienced management team are therefore not present here.

Potential Mitigations

• Even with an experienced team, it is beneficial to research the public reputation and track record of key executives.
• A discussion with current franchisees about their direct experiences with the management team can provide valuable qualitative insight.
• Your attorney can help you understand the roles and responsibilities of the key personnel listed in Item 2.

Explanation

This risk was not identified. KII discloses its multiple parent companies in Item 1. While the franchisor itself is now highly leveraged with negative equity, its audited financial statements are consolidated with its subsidiaries and provide a clear, albeit concerning, picture of the immediate franchising entity's financial state. There is no indication that a required parent company's financials have been omitted.

Potential Mitigations

• Your accountant should confirm that the provided financial statements are sufficient to assess the risk of the entire franchising entity.
• It is wise for your attorney to review the corporate structure in Item 1 to understand the relationships between the franchisor and its parents.
• Always question any lack of financial transparency, even if not a clear violation, with your professional advisors.

Explanation

This risk was not identified in the FDD package. Item 1 states that the franchisor, Kona Ice, Inc., does not have any predecessors. Therefore, there are no hidden historical issues from prior entities that could affect your investment. Your due diligence can focus entirely on the history and performance of the current franchisor entity.

Potential Mitigations

• Your attorney should still verify the franchisor's corporate history to confirm the 'no predecessor' declaration is accurate.
• Conducting a general background check on the company and its founders can sometimes reveal prior business activities not technically classified as a 'predecessor'.
• Speaking with long-term franchisees about the company's early history can confirm the information presented in Item 1.

Explanation

This risk was not identified in the FDD package. Item 3 states that there is no litigation that is required to be disclosed. This indicates the franchisor is not currently involved in any significant legal disputes with franchisees or other parties concerning fraud, contract violations, or other matters that would be a material risk to a prospective franchisee. The absence of such litigation is a positive indicator.

Potential Mitigations

• Although no litigation is disclosed, your attorney can conduct an independent public records search to verify this information.
• Engaging a business advisor to ask current franchisees about any past or pending disputes, even those not rising to the level of FDD disclosure, can be insightful.
• Always consider the dispute resolution clauses in Item 17, as they dictate how any future conflicts would be handled.