Explanation

This risk was not identified in the FDD package. Rapid system growth can strain a franchisor's ability to provide quality training and support. If a franchisor adds units faster than it scales its support infrastructure, new and existing franchisees may suffer from a decline in service quality, which can negatively impact their business operations and profitability. Monitoring this trend in Item 20 against the resources shown in Item 21 is important.

Potential Mitigations

• Questioning the franchisor about their specific plans to scale support staff and systems in line with projected growth is a topic for your business advisor.
• An accountant can help you review the franchisor's financial statements to determine if they are reinvesting sufficiently in support infrastructure.
• Your attorney can help you ask current franchisees about the quality and timeliness of the support they currently receive.

Explanation

This risk was not identified in the FDD package. An unproven franchise system presents higher risks because its business model, brand recognition, and support structures are not yet time-tested. A new franchisor may have limited experience, which could lead to operational challenges and an uncertain future for its franchisees. Careful evaluation of the management team's industry and franchising experience is crucial when considering such an opportunity.

Potential Mitigations

• Engaging a business advisor to research the leadership team's specific experience in both the industry and in managing a franchise system is beneficial.
• Speaking with the very first franchisees to join the system can provide valuable insight into its evolution and the franchisor's learning curve.
• An accountant should be consulted to scrutinize the franchisor's capitalization and financial stability.

Explanation

This risk was not identified in the FDD package. A business concept that is based on a short-term trend or fad carries the risk of declining consumer interest over time. If the business is a fad, you could find yourself with a long-term franchise agreement for a business with a shrinking market, jeopardizing your investment long after the initial popularity has faded. Evaluating the long-term demand for the product or service is essential.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term sustainability and demand for the services offered.
• It is wise to ask the franchisor about their research and development plans for new services to adapt to changing market conditions.
• Evaluating the business's resilience to economic shifts and changing consumer tastes with a financial advisor is a prudent step.

Explanation

This risk was not identified in the FDD package. A franchisor's management team lacking specific experience in franchising can be a significant risk, even if they are experts in the industry. Managing a franchise system requires a different skill set than running a corporate-owned business, involving support, training, and relationship management. Inexperience can lead to underdeveloped systems and inadequate support for franchisees, affecting your potential for success.

Potential Mitigations

• A thorough review of the executive biographies in Item 2 with your business advisor is important to assess their specific franchising credentials.
• Asking the franchisor if they have retained experienced franchise consultants or attorneys to guide their development is a key question.
• Inquiring with existing franchisees about the management team's competence and responsiveness can provide practical insights.

Explanation

This risk was not identified in the FDD package. When a franchisor is owned by a private equity firm, there may be a focus on short-term profitability and a quick exit strategy rather than the long-term health of the brand and its franchisees. This could potentially lead to increased fees, reduced support, and pressure to grow quickly, which might not align with your best interests as a long-term business owner.

Potential Mitigations

• Should you encounter a PE-owned franchisor, engaging a business advisor to research the firm's history with other franchise brands is crucial.
• Your attorney should review the assignment clause in the Franchise Agreement to understand your rights if the system is sold.
• Discussing any changes in culture or support since the PE acquisition with current franchisees would provide valuable information.

Explanation

This risk was not identified in the FDD package. A franchisor's predecessor is a company from which it acquired the business concept. If the FDD does not fully disclose the history of predecessors, including any past litigation, bankruptcies, or high franchisee turnover, you may be unaware of historical problems that could still affect the system. Understanding the complete lineage of the brand is important for a full risk assessment.

Potential Mitigations

• Your attorney should carefully analyze Item 1 for any mention of predecessors and cross-reference with Items 3 and 4.
• If a predecessor is identified, a business advisor can help you conduct independent research on that company's reputation and history.
• Asking long-tenured franchisees about their experience under any previous ownership can provide valuable context.