Explanation

This risk was not identified in the FDD package. Item 20 shows that no franchised outlets have ever been opened, terminated, or transferred. Therefore, there is no franchisee turnover data to analyze. High turnover is a significant red flag in established systems, as it can indicate problems with profitability, support, or the business model. For a new system like this one, this risk is not yet applicable but will become critical to monitor in future FDDs.

Potential Mitigations

• A business advisor can help you understand the importance of monitoring future FDDs for franchisee turnover rates.
• Your attorney can help you formulate questions for the franchisor about their strategies to ensure low franchisee turnover in the future.
• Discuss with your accountant how to evaluate the health of a franchise system using Item 20 data in the years to come.

Explanation

This risk was not identified in the FDD package. Item 20 data shows the system has not yet begun selling franchises, so there is no rapid growth. While not a current risk, should the system grow very quickly in the future, it could strain the new franchisor's ability to provide adequate support and training to all franchisees. This is a key metric to watch in subsequent FDDs.

Potential Mitigations

• In future years, consulting a business advisor to analyze the ratio of new units to support staff would be prudent.
• Your accountant can help assess if the franchisor's financial health is keeping pace with any future expansion.
• An attorney can advise on your contractual rights if franchisor support diminishes due to overly rapid growth.

Explanation

This risk was not identified in the FDD package. FDD Item 1 does not indicate that the franchisor is owned or controlled by a private equity firm. This type of ownership can be a risk because private equity firms often have a shorter-term investment horizon, which may lead to decisions that prioritize investor returns over the long-term health of franchisees. Since this is not present, this specific risk does not apply.

Potential Mitigations

• It is good practice to ask your attorney to verify the ownership structure of any franchisor you consider.
• A business advisor can help you understand the potential implications of different ownership structures, such as private equity versus founder-led.
• Should the franchisor be sold in the future, consult your attorney to understand your rights under the new ownership.

Explanation

This risk was not identified in the FDD package. Item 1 does not disclose a parent company structure for the franchisor. In some cases, a franchisor might be a thinly capitalized subsidiary of a larger, more stable parent. The failure to disclose the parent or provide its financials could hide risks. As no parent company is mentioned, this specific risk is not applicable here.

Potential Mitigations

• It is always a good practice for your attorney to verify the franchisor's corporate structure to ensure there are no undisclosed parent or affiliate entities.
• Your accountant should always review the provided financial statements to assess the franchisor's capitalization.
• Consulting a business advisor can help you understand the potential risks of dealing with a subsidiary versus a standalone company.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD states that the franchisor has no predecessors. A predecessor is a prior entity from which the franchisor acquired the business. A history of predecessors can sometimes introduce risks if the prior system had issues with litigation, bankruptcy, or franchisee failures. Since there is no predecessor history here, this risk is not applicable.

Potential Mitigations

• Your attorney should always confirm the accuracy of the predecessor information disclosed in Item 1.
• When a predecessor is listed, it is crucial to have a business advisor research the predecessor's history and reputation.
• Interviewing long-term franchisees can often reveal valuable insights about their experiences under any previous ownership.

Explanation

This risk was not identified in the FDD package. Item 3 of the FDD discloses no history of litigation involving the franchisor, its predecessors, or its management. A pattern of litigation, especially franchisee-initiated lawsuits alleging fraud or misrepresentation, can be a major red flag indicating systemic problems. The absence of such litigation is a positive indicator, though it is expected for a new franchisor with no operating franchisees.

Potential Mitigations

• Your attorney should still perform an independent search for any litigation that may not have been disclosed.
• Speaking with any former business associates of the management team could provide additional insight, a task your business advisor might assist with.
• It is important to review Item 3 in future FDDs to monitor for any emerging patterns of litigation.