Explanation

As a new franchise system that only began offering franchises in 2022, there is no history of franchisee turnover disclosed in Item 20. While this means no negative data exists, it also signifies a lack of an operational track record for the franchise system. You would be among the first franchisees, which carries its own set of risks related to unproven systems and support, without the benefit of feedback from a pool of experienced former franchisees.

Potential Mitigations

• Speaking with the franchisees who have signed agreements but not yet opened (listed in Exhibit E) could provide insight into the pre-opening process; your attorney can help frame questions.
• A business advisor can help you assess the risks inherent in joining a new and unproven franchise system.
• Your accountant should carefully review the franchisor's financial stability (Item 21) given the lack of operating history from franchisees.

Explanation

This risk was not identified in the FDD Package. A fad business is one tied to a fleeting trend, which could jeopardize long-term success once consumer interest fades. Your franchise agreement, however, would still be binding. Assessing whether a concept has enduring market appeal versus being a short-term novelty is a crucial part of due diligence.

Potential Mitigations

• Analyzing the long-term market demand for the core product or service with a business advisor can help gauge its sustainability.
• Your accountant can help you evaluate the business model's resilience to economic shifts and changing consumer tastes.
• Researching the history and longevity of similar concepts in the marketplace may provide valuable context.

Explanation

This risk was not identified in the FDD Package. The franchisor is disclosed as a private company owned by its founders. Private equity ownership can sometimes lead to a focus on short-term returns over the long-term health of the system or franchisee profitability. This can manifest in cost-cutting on support, pressure to use affiliated vendors, or a quick sale of the franchise system.

Potential Mitigations

• Should a franchisor be owned by a private equity firm, a business advisor can help research the firm's track record with other franchise concepts.
• It would be prudent to ask an attorney to review any clauses related to the sale or assignment of the franchise system.
• Talking with franchisees who have been through a sale to a PE firm can provide valuable insight.

Explanation

This risk was not identified in the FDD Package. The franchisor discloses its affiliates, True Love Goods, LLC (operator of the original outlet) and Love & Honey IP Holdings, LLC (owner of the trademarks), but does not indicate it is a subsidiary of a parent company. Failure to disclose a parent company, especially if it guarantees obligations or is a key supplier, can obscure the true financial backing and stability of the franchisor.

Potential Mitigations

• An attorney can help verify the franchisor's corporate structure if there is any ambiguity.
• If a parent company were involved, an accountant should review both the franchisor's and the parent's financial statements.
• Understanding any financial guarantees or support provided by a parent company is crucial, and your attorney can ensure these are properly documented.

Explanation

This risk was not identified in the FDD Package. L&HFC is a new franchisor and does not list any predecessors from which it acquired the business. When a franchisor has a predecessor, it is important to review their history for any signs of trouble, such as litigation, bankruptcy, or high franchisee turnover, as these issues could be inherited by the current franchisor.

Potential Mitigations

• An attorney can help research a predecessor's public records for litigation or bankruptcy history if one were disclosed.
• If a system was acquired, talking to long-term franchisees about their experience under the previous ownership is a key due diligence step.
• Your accountant would analyze whether a predecessor's financial issues have been resolved or are likely to affect the new entity.

Explanation

This risk was not identified in the FDD Package. Item 3 states that no litigation is required to be disclosed. A pattern of lawsuits, especially those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a significant red flag about the franchisor's practices and the health of the system. Conversely, a high number of suits initiated by the franchisor against franchisees might indicate an overly aggressive or litigious culture.

Potential Mitigations

• Confirming the absence of litigation with your attorney is a good practice.
• A business advisor can help you search online for any informal complaints or news reports of disputes that may not have risen to the level of disclosable litigation.
• An attorney can explain what types of litigation are required to be disclosed under federal and state law.