Explanation

This specific risk was not identified in the FDD Package. The tables in Item 20 show zero terminations, non-renewals, or company re-acquisitions of franchised outlets in the last three years. While this data is positive, high turnover can be a major red flag in other systems, often indicating franchisee dissatisfaction, lack of profitability, or systemic problems. A stable and satisfied franchisee base is crucial for brand strength and validating the business model.

Potential Mitigations

• You should still contact a significant number of current franchisees listed in Item 20 to inquire about their satisfaction and profitability, which a business advisor can help you with.
• During your review with an attorney, ask about the definitions the franchisor uses for turnover categories to ensure they are not misleading.
• An accountant can help you analyze the growth data in Item 20 to understand how the system is evolving.

Explanation

This risk was not identified in the FDD Package. Item 1 does not indicate that KPOT Franchise LLC (KPOT) is owned or controlled by a private equity firm. This is generally a positive factor, as franchise systems owned by private equity can sometimes face pressure for short-term returns, which may not align with the long-term health of franchisees. However, you should remain aware of the ownership structure and any potential future sale of the company.

Potential Mitigations

• It is still prudent to have your attorney review the assignment clauses in the Franchise Agreement to understand your rights if the system is sold in the future.
• Ask the franchisor about their long-term vision for the company and any plans for future changes in ownership.
• A business advisor can help you understand the potential impacts of different ownership structures on a franchise system.

Explanation

This risk was not identified in the FDD Package. Item 1 appears to disclose the parent company, KPOT Enterprises, LLC. However, because the franchisor has a documented weak financial position and relies on affiliates for critical functions like intellectual property and supplies, the financial health and stability of these related entities are highly material. The FDD does not include financial statements for these other entities, which can obscure a complete picture of the overall enterprise's stability.

Potential Mitigations

• Your accountant should carefully review the related party transactions detailed in the notes to the franchisor's financial statements.
• Ask your attorney to inquire about the financial health of the affiliate that owns the trademarks and the mandatory affiliate suppliers.
• A business advisor can help you assess the risks associated with the complex web of related companies.

Explanation

This risk was not identified in the FDD Package. Item 1 states that the franchisor has no predecessor. This means the company did not acquire the business from a prior entity, and the history presented in the FDD is the complete history of this particular franchisor. In other franchises, a predecessor's negative history, such as litigation or high franchisee failure rates, can sometimes be an important indicator of underlying systemic issues.

Potential Mitigations

• Confirmation that there is no predecessor simplifies due diligence, but your attorney should still verify the franchisor's corporate history.
• A business advisor can help you focus your due diligence on the franchisor's own limited operating history.
• Your accountant should review the financial statements from the company's inception to understand its complete financial trajectory.

Explanation

This risk was not identified in the FDD Package. Item 3 states that no litigation is required to be disclosed. This is a positive finding, as a pattern of lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems within a franchise. Likewise, a high number of lawsuits initiated by the franchisor against franchisees can suggest an overly aggressive or litigious culture.

Potential Mitigations

• Although no litigation is disclosed, your attorney may suggest conducting a public records search as part of comprehensive due diligence.
• Discussing any past or current disputes with existing franchisees is a valuable step a business advisor can help you prepare for.
• Ensure you understand the dispute resolution process outlined in the Franchise Agreement with your attorney, in case a future conflict arises.