Explanation

The franchisor's audited financial statements appear healthy. For fiscal year 2024, Mountain Mike's Pizza, LLC (MMP) reported net income of $4.59 million and retained a strong member's equity of $43.7 million. While net income decreased from 2023, this was due to a large, one-time expense for an area developer rights buyout, indicating a strategic investment rather than operational weakness. The financial statements do not indicate instability.

Potential Mitigations

• An accountant should review the financial statements, including all footnotes and the auditor's opinion, to confirm this assessment of financial health.
• Engaging a business advisor to discuss the long-term implications of the franchisor's recent strategic acquisitions is recommended.
• Your attorney can help you understand any financial obligations the franchisor has guaranteed for its parent company, as detailed in the footnotes.

Explanation

This risk was not identified in the FDD package. Item 20 data for 2022-2024 does not show a high rate of terminations, non-renewals, or stores ceasing operations for other reasons. High turnover can be a major red flag, potentially indicating systemic issues such as franchisee dissatisfaction, lack of profitability, or poor franchisor support. A stable and growing franchise system is generally a positive indicator for prospective franchisees.

Potential Mitigations

• It is still wise to have your business advisor help you analyze the Item 20 transfer data to understand the rate of stores changing hands.
• Speaking with former franchisees listed in Exhibit J is a crucial step to verify the reasons for their departure.
• Your accountant can help you calculate the annual churn rate from the Item 20 tables to compare it against any available industry benchmarks.

Explanation

The franchise system is mature and shows steady, but not alarmingly rapid, growth, expanding from 265 to 299 units between the start of 2023 and the end of 2024. While any growth strains resources, the pace appears manageable for an established system with experienced management. The primary risk is ensuring that support infrastructure, detailed in Item 11, keeps pace with this expansion to maintain service quality for all franchisees.

Potential Mitigations

• Discussing the scalability of the franchisor's support systems with your business advisor can provide valuable context.
• Inquiring with both new and established franchisees about the current quality and responsiveness of franchisor support is a key due diligence step.
• Your attorney should review the support commitments outlined in Item 11 to understand the franchisor's contractual obligations.

Explanation

This risk was not identified. The franchisor's predecessor has been operating since 1978, and the current ownership has been in place since 2017. Item 2 shows an executive team with extensive experience in the restaurant and franchise industries at major brands. The system is well-established with nearly 300 units, indicating it is not a new or unproven concept. This history and experience reduce the risks typically associated with new franchise systems.

Potential Mitigations

• Your business advisor can help you research the history of the brand and its performance under both current and predecessor ownership.
• It is still prudent to ask long-term franchisees about their experiences with the system's evolution and management changes over time.
• An attorney can review the details of the 2017 acquisition described in Item 1 to understand any inherited obligations or liabilities.

Explanation

This risk was not identified. The business model, focused on pizza, is a well-established and enduring segment of the restaurant industry with a long history of consumer demand. The franchisor has been in operation since 1978, demonstrating long-term viability and resilience through various economic cycles. The concept does not appear to be dependent on a short-term trend or fad, which mitigates this particular risk.

Potential Mitigations

• A business advisor can still assist in analyzing the competitive landscape for pizza restaurants in your specific market.
• Discussing the brand's strategies for innovation and staying relevant with current franchisees can provide insight into its long-term vision.
• Your financial advisor can help you assess the model's resilience to local economic conditions and competition.

Explanation

This risk was not identified. Item 2 of the FDD details the business experience of the franchisor's key personnel. The executive team, including the CEO and COO, demonstrates extensive and relevant experience in senior roles at major restaurant and franchise companies like Yum Brands, Blaze Pizza, and Biscuitville. This level of experience suggests the management team is well-equipped to manage a franchise system, which is a positive factor.

Potential Mitigations

• It is still beneficial to ask current franchisees about their direct experiences with the management team's competence and support.
• A business advisor can help you research the public track records of the key executives mentioned in Item 2.
• Your attorney can review the employment agreements for key personnel, if available, to understand their long-term commitment to the brand.

Explanation

The FDD discloses a predecessor, Concept Acquisitions, LLC, from which MMP acquired substantially all assets in 2017. While the document provides basic information, a full picture of the system's historical challenges or performance under the predecessor is not detailed. Any issues from that era, such as franchisee relations or litigation not meeting disclosure thresholds for Item 3, would not be apparent from this FDD alone, creating a potential information gap.

Potential Mitigations

• Speaking with franchisees who have been with the system since before the 2017 acquisition is essential to understand the transition and any inherited issues.
• Your business advisor can assist in researching public information or news articles related to the predecessor brand.
• An attorney can review the asset purchase details to understand what liabilities, if any, were assumed by the current franchisor.

Explanation

This risk was not identified in the FDD package. Item 3 explicitly states, 'No litigation is required to be disclosed in this Item.' This indicates an absence of material legal actions involving the franchisor related to fraud, franchise law violations, or other specified serious matters. Additionally, Item 4 discloses a personal bankruptcy of an officer from 2016, but no bankruptcy involving the franchisor entity itself. This is a positive indicator of legal and financial stability.

Potential Mitigations

• It is still a good practice to have your attorney conduct an independent public records search for litigation involving the franchisor or its principals.
• Asking current franchisees about their awareness of any legal disputes within the system can provide additional insight.
• A business advisor can help you understand the context of the officer's past personal bankruptcy mentioned in Item 4.