Explanation

This risk was not identified in the FDD package. A fad business is one that capitalizes on a short-term trend, which can lead to a rapid decline in sales once consumer interest wanes. It is important to assess whether a franchise concept has long-term market sustainability or if its appeal is tied to a potentially fleeting trend. Your franchise agreement obligations will continue even if the business concept's popularity fades, posing a significant financial risk.

Potential Mitigations

• Engage a business advisor to research the industry and assess the long-term consumer demand for the products offered.
• Question the franchisor about their long-term strategy, product development pipeline, and plans for adapting to changing consumer tastes.
• Develop financial projections with your accountant that model various scenarios, including a potential decline in consumer interest over time.

Explanation

This risk was not identified in the FDD package. Key executives appear to have relevant prior experience in retail operations and finance with established companies. However, when evaluating a franchise, it is crucial to assess whether the management team has experience not only in the specific industry but also in managing a franchise system. Inexperienced franchisor management can lead to inadequate franchisee support, weak systems, and poor strategic decisions, even if they are experts in the underlying business.

Potential Mitigations

• A business advisor can help you research the backgrounds of all key executives listed in Item 2.
• When speaking with current franchisees, inquire specifically about their assessment of the management team's competence in supporting the franchise network.
• Your attorney can help you understand the importance of having an experienced team leading the franchise.

Explanation

This risk was not identified in the FDD package, as Item 1 does not indicate ownership by a private equity firm. When a franchisor is owned by a private equity fund, there can be a focus on short-term profitability to prepare for a future sale of the company. This might lead to decisions that benefit the fund's investors, such as cutting support services or increasing fees, rather than focusing on the long-term health of franchisees.

Potential Mitigations

• A business advisor can help research the ownership structure of the franchisor if it is not clearly stated.
• If a PE firm is involved, you should ask current franchisees about any changes in operations or philosophy since the acquisition.
• Your attorney can help you understand the potential impacts of PE ownership on a franchise system.

Explanation

The FDD states that the franchisor has no predecessors. A predecessor is a company from which the franchisor acquired the major portion of its assets. Understanding a predecessor's history, including any past litigation or bankruptcy, is important as it can reveal inherited issues or potential weaknesses in the business model that may not be immediately apparent from reviewing the current franchisor's information alone. The absence of a predecessor simplifies this aspect of due diligence.

Potential Mitigations

• Your attorney can confirm the franchisor's corporate history to ensure no predecessor information has been omitted.
• A business advisor can still help you research the history of the brand itself, even if the specific franchising entity is new.
• Focus your due diligence with current franchisees on the performance and history of the current franchising entity.

Explanation

Item 3 of the FDD states that there is no litigation that requires disclosure. While this is positive, it is important to understand that the disclosure thresholds are based on materiality. You should still perform independent due diligence, as a lack of disclosed litigation does not guarantee a dispute-free history. A pattern of litigation, particularly claims of fraud or misrepresentation brought by franchisees, can be a major red flag indicating systemic problems within a franchise.

Potential Mitigations

• Consulting with your attorney can help you understand the types of litigation that are required to be disclosed.
• You should ask current and former franchisees about any disputes they may have had with the franchisor, even if they didn't result in litigation.
• A business advisor can help you conduct online searches for news articles or other public information about the franchisor.