Explanation

The franchisor's audited financial statements show profitability and positive operating cash flow, which are indicators of stability. However, the balance sheet for the most recent fiscal year shows a current ratio of approximately 1.13, which suggests that current liabilities are nearly as large as current assets. A low current ratio can sometimes indicate potential challenges in meeting short-term financial obligations, though overall financial health appears solid.

Potential Mitigations

• An experienced franchise accountant should review the complete financial statements, including all footnotes, to assess the company's overall financial health and liquidity.
• Discuss the current ratio and the company's strategies for managing short-term liabilities with your financial advisor to gauge any potential risk.
• Ask your accountant to analyze trends in the franchisor's financial statements over the past three years for a more complete picture of its stability.

Explanation

The franchisee turnover rate appears low based on the data in Item 20, which is a positive sign. However, you should note that the Financial Performance Representation in Item 19 explicitly excludes the results of 25 stores that closed during the 2024 reporting period. While the raw turnover numbers are not high, the exclusion of closed stores from performance data is a critical factor to consider when evaluating the provided earnings information.

Potential Mitigations

• With your business advisor, you should contact a significant number of current and former franchisees from the lists in Item 20 to discuss their experiences.
• Ask the franchisor for clarification on the reasons for the 19 “Ceased Operations” and 6 “Terminations” in 2024.
• A franchise attorney can help you formulate specific questions to ask former franchisees regarding their reasons for leaving the system.

Explanation

The system has shown steady growth over the past three years, expanding from 952 to 1,114 franchised outlets. This rate of growth does not appear to be excessively rapid, and the franchisor's profitable financial statements suggest it may have the resources to support this expansion. This indicates a potentially stable and managed growth trajectory rather than a high-risk, rapid expansion that outpaces support capabilities.

Potential Mitigations

• When speaking with franchisees, it is a good practice to ask those who opened recently about the quality and timeliness of the support they received.
• A discussion with your business advisor can help you assess if the franchisor's support infrastructure, as described in Item 11, seems adequate for the system's size.
• Your accountant can review the franchisor's investments in support-related expenses to see if they are keeping pace with system growth.

Explanation

This risk was not identified in the FDD package. Marco's Franchising, LLC (Marco's LLC) began offering franchises in 2004 and is a large, established system. An unproven system presents higher risks because its business model, brand recognition, and support infrastructure may not be fully developed, leading to greater uncertainty for franchisees.

Potential Mitigations

• When evaluating any franchise, it is beneficial to have a business advisor help you assess the maturity and stability of the system.
• Consulting with an experienced franchise attorney is crucial to understand the rights and obligations within any franchise system, regardless of its age.
• An accountant can analyze the financial track record of a franchisor to gauge its long-term viability.

Explanation

This risk was not identified. The sale of pizza is a well-established and enduring segment of the food service industry, not a business model based on a short-term trend or fad. A fad-based business carries the risk that consumer interest could decline rapidly, potentially harming the long-term viability of your investment after the trend passes.

Potential Mitigations

• A business advisor can help you research the long-term market trends for any industry you consider entering.
• It is wise to have your accountant help you create financial projections that account for potential shifts in consumer preferences over time.
• Reviewing a franchisor's history of product innovation and adaptation with a business consultant can provide insight into its long-term focus.

Explanation

This risk was not identified. Item 2 of the FDD indicates that the franchisor's management team has significant experience in the restaurant and franchise industries. Inexperienced management can be a risk because it may lead to inadequate franchisee support, poor strategic decisions, and underdeveloped operational systems, which could negatively impact your business.

Potential Mitigations

• When evaluating a franchise, a thorough review of the executive team's biographies in Item 2 with a business advisor is a critical due diligence step.
• It is always a good practice to ask current franchisees about their perception of the management team's competence and support.
• An experienced franchise attorney can often provide context on the importance of a seasoned leadership team in a franchise system.

Explanation

The FDD does not indicate that the franchisor is owned by a private equity firm. When a franchisor is PE-owned, there can be a risk that management decisions prioritize short-term investor returns over the long-term health of franchisees, which might manifest as reduced support or increased fees. The franchisor's parent is disclosed as Marco's Pizza Holdings, LLC.

Potential Mitigations

• Understanding the complete ownership structure of a franchisor is a key due diligence step to perform with your franchise attorney.
• A business advisor can help you research the reputation and track record of any parent company or private equity firm involved in a franchise.
• Franchisees in systems owned by PE firms should be asked about any changes in direction or support since the acquisition.

Explanation

This risk was not identified. The FDD discloses that Marco's Franchising, LLC is a subsidiary of Marco's Pizza Holdings, LLC. The provided financial statements for the franchisor entity appear robust, so the parent's financials are likely not required for disclosure. Failing to disclose a parent company or its financials when required can hide financial instability or other risks from prospective franchisees.

Potential Mitigations

• Your franchise attorney should always verify that the FDD properly discloses all parent and affiliate companies as required by law.
• If a franchisor is a new or thinly capitalized entity, an accountant should advise if the parent company's financial statements should have been included for a complete risk assessment.
• It is good practice to ask your business advisor to help you map out the entire corporate structure to understand all related entities.

Explanation

This risk was not identified in the FDD package. The franchisor does not list any predecessors from which it acquired the business. Reviewing the history of a predecessor is important because it can reveal inherited issues, such as past litigation, bankruptcy, or a pattern of franchisee failure, that might not be immediately apparent from looking at the current franchisor alone.

Potential Mitigations

• A franchise attorney can help you investigate the history of the business, including any predecessor entities mentioned in Item 1.
• If a predecessor exists, asking long-term franchisees about their experience under the previous ownership is a valuable due diligence step.
• An accountant should review any available financial data from a predecessor to assess historical performance and stability.