Explanation

This specific risk was not identified in the FDD package. Rapid, uncontrolled growth can strain a franchisor's ability to provide adequate support to all its franchisees. Monitoring growth rates in Item 20 against the franchisor's disclosed support staff and financial resources is a key part of due diligence to ensure the system is not expanding beyond its capabilities, which could negatively impact your business in the future.

Potential Mitigations

• It is wise to ask existing franchisees about their perception of the quality and timeliness of support as the system has grown.
• A business advisor can help you analyze the ratio of support staff to franchisees to assess if the infrastructure appears adequate for the current system size.
• Reviewing the franchisor's hiring plans for support personnel with your legal counsel can provide insight into their strategy for managing growth.

Explanation

This risk was not identified. The franchisor's principals began operations in 1970 and have been franchising since 1977, indicating extensive experience in both the industry and in franchising. The system is well-established, not a new or unproven concept. Unproven systems carry higher risks, as their business models, brand recognition, and support structures may not be fully developed, potentially leading to a higher rate of failure for new franchisees.

Potential Mitigations

• Even with an established system, it is beneficial to discuss the franchisor's recent innovations and strategic direction with a business advisor.
• Asking current franchisees about the evolution of the system and the management's effectiveness over time can provide valuable perspective.
• Your accountant can review the long-term financial trends in Item 21 to confirm the system's sustained viability.

Explanation

This risk was not identified in the FDD package. The retail liquor store business model is a long-established industry with consistent consumer demand, not a business based on a short-term fad. Investing in a fad business can be risky because consumer interest may decline rapidly, leaving you with a long-term franchise agreement for a business that is no longer viable, potentially leading to financial loss.

Potential Mitigations

• A business advisor can help you research the long-term market trends for off-sale retail liquor in your specific geographic area.
• Discuss the competitive landscape and potential for disruption from online sales or delivery services with your financial advisor.
• Engaging a marketing consultant could help assess the brand's positioning for long-term relevance against competitors.

Explanation

This risk was not identified. Item 2 shows that the key executives of M.G.M. have extensive, multi-decade experience in the retail liquor industry and with the franchise system itself. Inexperienced management can be a major risk, as it may lead to poor strategic decisions, underdeveloped operational systems, and inadequate support for franchisees, which could negatively impact your potential for success.

Potential Mitigations

• It is always a good practice to research the recent performance and reputation of the management team with the help of a business advisor.
• Talking to current franchisees about their direct experiences with the leadership team can provide valuable insights into their operational competence.
• Your attorney can help you formulate questions for the franchisor regarding their vision and strategic plans for the future.

Explanation

This risk was not identified in the FDD package, as Item 1 indicates the franchisor is part of a long-standing family of companies, not one owned by a private equity firm. Private equity ownership can introduce risks, as their focus may be on short-term returns, potentially leading to increased fees, reduced franchisee support, or a quick sale of the franchise system, which could affect your long-term investment.

Potential Mitigations

• Understanding the ownership structure of any franchise is a critical step; your attorney can help you analyze the information in Item 1.
• A business advisor can assist in researching the reputation and track record of any corporate parent or controlling entity.
• Talking with existing franchisees about any recent changes in ownership can reveal shifts in company culture or support levels.

Explanation

This risk was not identified. The FDD clearly discloses in Item 1 that M.G.M. is a subsidiary of M.G.M. Wine & Spirits, Inc. (the Parent). The franchisor's financial statements are provided, and while the Parent's are not, there is no indication that a guarantee from the Parent is offered or required. Failing to disclose a parent company can obscure financial weaknesses or control structures, preventing a full risk assessment.

Potential Mitigations

• Your accountant should always review the corporate structure disclosed in Item 1 and the financials in Item 21 to assess the relationship between entities.
• An attorney can advise if the financials of a parent company should have been included based on FTC rules, such as if the parent guarantees the franchisor's performance.
• Discussing the operational and financial relationship between the franchisor and its parent with a business advisor can provide useful context.

Explanation

This risk was not identified. Item 1 details the franchisor's history, which includes predecessors, but there is no indication of hidden negative history. Full disclosure of a predecessor's history, including any past litigation, bankruptcy, or franchisee failures, is crucial. Incomplete information could hide systemic issues that may still affect the franchise system today, impacting your investment.

Potential Mitigations

• A thorough review of Items 1, 3, and 4 with your attorney is crucial to understand the complete history of the franchise system.
• Speaking with long-term franchisees about their experiences under any previous ownership can provide invaluable historical context.
• A business advisor can help you conduct independent research on any named predecessor companies to look for undisclosed issues.

Explanation

This risk was not identified. Item 3 discloses two legal actions, both initiated by the franchisor or its affiliates against franchisees for enforcement of contractual obligations, which is not unusual. A pattern of lawsuits brought by franchisees alleging fraud or misrepresentation would be a significant red flag, suggesting potential systemic issues with the franchisor's sales practices or operations.

Potential Mitigations

• It is wise to have your attorney review any litigation disclosed in Item 3 to understand the nature and outcome of the disputes.
• Asking current franchisees about the franchisor's general approach to disputes can offer insight into the relationship dynamics.
• A business advisor can help you assess whether the disclosed litigation indicates a healthy or a dysfunctional franchise system.