Explanation

This specific risk was not identified in the FDD package. Because Liberty Bagels is a new franchisor, it has no existing or former franchisees, so the franchise status tables in Item 20 are all zero. While this means there is no reported turnover, the complete lack of a track record with franchisees is itself a significant risk, as there are no independent operators you can contact to verify the business model or the franchisor’s support.

Potential Mitigations

• A business advisor can help you assess the inherent risks of joining a system with no franchisee operating history.
• It is crucial to have your attorney review the FDD for other signs of system health, given the absence of turnover data.
• Discuss the implications of being one of the first franchisees with your accountant to model a wider range of financial outcomes.

Explanation

This risk was not identified, as the franchise system is new and has zero franchised outlets. Rapid growth can strain a franchisor's ability to provide adequate support, training, and quality control to all its franchisees. When a system expands too quickly, the resources for assisting individual locations can be spread thin, potentially harming franchisee performance and brand reputation. Careful analysis of a franchisor’s support infrastructure in relation to its growth is important.

Potential Mitigations

• Your business advisor can help you analyze a franchisor's growth plans relative to its support infrastructure.
• Asking an attorney to review the franchisor's contractual support obligations is a prudent step.
• An accountant can assess if the franchisor's financials support a sustainable growth model.

Explanation

This risk was not identified in the FDD package. The business is a retail bagel shop, which is a well-established food service concept rather than a fad. A fad business is tied to a short-lived trend, and investing in one is risky because consumer demand may disappear long before your franchise agreement or lease expires, potentially leading to business failure. Evaluating the long-term consumer demand for a franchise's core products is a crucial part of due diligence.

Potential Mitigations

• A business advisor can help you research the long-term market trends for any franchise industry you consider.
• Analyzing a company's plans for innovation with an accountant can reveal its strategy for staying relevant beyond initial trends.
• It is prudent to have your attorney review the franchise agreement's term against the potential lifespan of a trendy business.

Explanation

This risk was not identified, as Item 1 does not indicate that a private equity firm owns Liberty Bagels. When a franchisor is owned by a private equity firm, there can be a risk that decisions are focused on short-term investor returns rather than the long-term health of the franchisees. This could manifest as increased fees, reduced support, or a quick sale of the franchise system, which might introduce an owner with a different philosophy.

Potential Mitigations

• It is beneficial to have a business advisor research the ownership structure of any franchise system you are considering.
• Your attorney can help you understand the franchisor's right to sell or assign the franchise agreement.
• Reviewing the track record of a private equity owner with other franchise brands they have owned is a key diligence step.

Explanation

This risk was not identified in the FDD package. Liberty Bagels states it has no parent company. A risk can arise if a franchisor is a thinly capitalized subsidiary of a larger parent company, but the parent does not provide its financial statements or a guarantee. This can obscure the true financial stability and backing of the franchise system. Proper disclosure requires transparency about the entities that ultimately control and support the franchisor.

Potential Mitigations

• Your attorney should verify the corporate structure if there is any ambiguity about a controlling parent entity.
• If a parent company provides a guarantee, it's wise for your accountant to review the parent's financial statements.
• Understanding the full corporate structure helps assess where the ultimate responsibility for franchisor support lies.

Explanation

This risk was not identified, as Item 1 clearly states that Liberty Bagels has no predecessors. When a franchisor has acquired its system from a predecessor, it's important to understand that predecessor's history. A failure to fully disclose a predecessor's track record, especially if it involved litigation, bankruptcy, or high franchisee turnover, could hide systemic problems that you might inherit as a new franchisee.

Potential Mitigations

• Your attorney can help you carefully review any predecessor information disclosed in Items 1, 3, and 4.
• A business advisor can assist in researching a predecessor's public reputation and history.
• Speaking with long-term franchisees who operated under a predecessor provides invaluable insight.

Explanation

This risk was not identified in the FDD package, as Item 3 discloses no litigation. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, is a significant red flag that can indicate systemic problems within a franchise. Conversely, a high number of lawsuits initiated by the franchisor against its franchisees might suggest an overly aggressive or litigious culture. Reviewing Item 3 is a critical step in assessing a franchisor's history and relationships.

Potential Mitigations

• It is essential to have your attorney carefully review the nature, status, and outcomes of all litigation disclosed in Item 3.
• A business advisor can help you assess whether the amount of litigation is unusual for the size and age of the system.
• Contacting franchisees involved in past litigation can provide direct insight into the nature of disputes.