Explanation

The FDD does not indicate high franchisee turnover. As a new franchise system in the U.S., it has only one operational franchised unit, with no terminations, non-renewals, or other cessations reported. While not a risk now, monitoring this in future FDDs is vital as the system grows. High turnover is often a primary indicator of systemic problems, such as lack of profitability or poor support.

Potential Mitigations

• A business advisor can help you understand the importance of monitoring Item 20 data in future FDDs as the system develops.
• When more franchisees exist, consulting with your attorney on questions to ask them about their satisfaction can provide valuable insights.
• Your accountant should analyze future Item 20 tables to calculate the franchisee churn rate.

Explanation

This risk was not identified in the FDD package. The business model, focused on Korean-style fried chicken, operates in a competitive but well-established market segment. It does not appear to be based on a short-term fad. A fad business carries the risk that consumer interest could decline rapidly, jeopardizing your long-term investment, while your contractual obligations remain.

Potential Mitigations

• A business advisor can help you research the long-term consumer demand and market trends for the products and services offered.
• It is wise to evaluate a business's resilience to economic shifts and changing consumer tastes with a financial advisor.
• Asking existing franchisees about local market sustainability can provide useful, real-world insight.

Explanation

This risk was not identified in the FDD package. Item 1 indicates the franchisor is a subsidiary of a publicly-traded South Korean corporation, not a private equity firm. Private equity ownership can sometimes introduce risks related to prioritizing short-term investor returns over the long-term health of franchisees, which does not appear to be a factor here.

Potential Mitigations

• Your attorney can help you verify the ownership structure detailed in Item 1 of the FDD.
• A business advisor can research the ownership history of a franchisor to identify any past private equity involvement.
• Understanding the franchisor's ownership is important, as it can influence company strategy and franchisee support levels.

Explanation

This risk was not identified in the FDD package. Item 1 clearly discloses the parent and guarantor (Kyochon USA Inc.) and the ultimate parent company. Furthermore, the FDD includes audited financials and a formal Guarantee of Performance for the parent guarantor in Exhibit B, which is compliant with disclosure rules. A failure to disclose a parent could hide financial instability or other risks.

Potential Mitigations

• Your attorney should always verify that the entities disclosed in Item 1 match the corporate structure and that financials for any required parent or guarantor are included.
• An accountant can help determine if a parent company's financials should have been included based on the franchisor's structure.
• Confirming that any guarantees are properly executed is a task for your legal counsel.

Explanation

This risk was not identified in the FDD package. Item 1 explicitly states that the franchisor has no predecessors. A predecessor is a company from which the franchisor acquired the business, and a history of issues with a predecessor could indicate inherited problems for the current franchise system. Since there is no predecessor, this specific risk is not applicable.

Potential Mitigations

• Your attorney can help verify the franchisor's corporate history as stated in Item 1.
• A business advisor can assist in researching a company's background for any undisclosed predecessor entities.
• Understanding the full history of the franchise system is a key part of due diligence.

Explanation

This risk was not identified. Item 3 discloses no litigation. While Note 5 of the financials reveals a settled employment class action lawsuit, this does not represent a pattern of litigation initiated by franchisees alleging fraud or misrepresentation. A pattern of such lawsuits would be a significant red flag about the franchisor's business practices.

Potential Mitigations

• Your attorney should always carefully review Item 3 for any lawsuits, especially those brought by other franchisees.
• It is wise to ask current and former franchisees about their experiences and whether they have had significant disputes with the franchisor.
• A business advisor can help you research public records for litigation involving the franchisor that may not yet be disclosed.