Explanation

This risk was not identified in the FDD package. The data in Item 20 shows a stable and growing franchise system with no reported terminations, non-renewals, or cessations of operation over the last three years. High franchisee turnover is a significant red flag as it can signal systemic problems, such as franchisee unprofitability, dissatisfaction with the franchisor's support, or an unviable business model. The lack of such turnover here is a positive indicator.

Potential Mitigations

• It is still wise to ask a broad selection of current franchisees about their satisfaction and profitability with the help of your business advisor.
• Your accountant can help you analyze the Item 20 tables in any FDD to calculate the effective annual turnover rate.
• An attorney can help you frame questions for former franchisees to understand why they left the system, if any are listed.

Explanation

This risk was not identified in the FDD package. The business operates in the coffee and café industry, which is a well-established market with sustained consumer demand rather than being based on a short-term trend. A fad business carries the risk that its popularity will decline quickly, potentially leading to business failure even if you are locked into a long-term franchise agreement.

Potential Mitigations

• A business advisor can help you research any industry to assess long-term market trends versus short-term fads.
• When evaluating a franchise, an accountant can help model financial performance under different market condition scenarios.
• Legal counsel should be consulted to understand your obligations if the business becomes unviable due to shifting consumer tastes.

Explanation

This risk was not identified in the FDD package. The management team detailed in Item 2 appears to have relevant, long-term experience within the coffee industry and with this specific business concept. Inexperienced leadership can be a significant risk, as it may lead to poor strategic decisions, weak operational systems, and inadequate support for franchisees.

Potential Mitigations

• It is always prudent to research the backgrounds of the key executives listed in Item 2 with the help of your business advisor.
• Discussions with current franchisees can provide valuable insight into their confidence in the management team's capabilities.
• An attorney can help you understand the implications if key personnel named in the FDD were to leave the company.

Explanation

This risk was not identified in the FDD package. According to Item 1, the franchisor is owned by individuals, not a private equity firm. Private equity ownership can introduce risks related to a focus on short-term profitability, which may lead to cuts in franchisee support, increased fees, or a quick sale of the franchise system, potentially to the detriment of franchisees' long-term interests.

Potential Mitigations

• A business advisor can help you research the ownership structure of any franchisor to identify potential private equity involvement.
• If a franchisor is PE-owned, speaking with franchisees who have been in the system before and after the acquisition is crucial.
• Your attorney should review any clauses in the Franchise Agreement that permit the franchisor to sell or assign the system.

Explanation

This risk was not identified in the FDD package. Item 1 states the franchisor has no parent company. When a franchisor is a subsidiary, the financial health and influence of the parent company become critical. Failing to disclose a parent or provide its financial statements (if it guarantees the franchisor's obligations) can hide significant risks related to the overall stability and backing of the franchise system.

Potential Mitigations

• Your attorney can help you verify the corporate structure of the franchisor to confirm the absence of a parent entity.
• If a parent company exists, an accountant should review its financial statements if they are provided or required.
• Understanding any guarantees or support provided by a parent company is a key task for your attorney.

Explanation

This risk was not identified in the FDD package. Item 1 clearly states that the franchisor has no predecessors. A predecessor is a company from which the franchisor acquired the main assets of the business. A history of predecessors can sometimes introduce risks if that history includes litigation, bankruptcy, or other systemic problems that could be inherited by the current franchisor.

Potential Mitigations

• Your attorney should always verify the predecessor information disclosed in Item 1 of any FDD.
• If a predecessor is disclosed, a business advisor can help you research its history for any potential red flags.
• Speaking with long-term franchisees can reveal important history about the system under previous ownership.

Explanation

This risk was not identified in the FDD package. Item 3 discloses no litigation history. A pattern of lawsuits filed by franchisees against a franchisor, especially those alleging fraud or breach of contract, can be a major red flag indicating systemic issues. Similarly, a high number of lawsuits filed by the franchisor against its franchisees can suggest an overly litigious or punitive relationship.

Potential Mitigations

• An attorney should always carefully analyze the nature, frequency, and outcomes of any lawsuits disclosed in Item 3.
• Your business advisor can help you research public records for any litigation that may not have been disclosed.
• It is important to ask current and former franchisees about any past or present disputes within the system.