Explanation

This risk was not identified. The audited financial statements in Exhibit H for Nathan's Famous Systems, Inc. (NFSI) show a financially strong company with significant annual net income and substantial positive stockholder's equity. A franchisor's robust financial health is crucial as it suggests they possess the resources to support franchisees, invest in the brand, and fulfill their contractual obligations long-term.

Potential Mitigations

• Having an accountant perform a thorough review of the franchisor's complete audited financial statements, including all footnotes, is essential to independently verify financial stability.
• A discussion with your financial advisor about the franchisor's revenue sources, such as royalties versus initial fees, can provide insight into their business model's health.
• Your business advisor can help assess if the franchisor's financial position is strong enough to support the system's growth and provide promised services.

Explanation

This risk was not identified. The data in Item 20 indicates that the Branded Menu Program system has been relatively stable or has slightly decreased in size over the last three years; it is not undergoing rapid expansion. Uncontrolled growth can strain a franchisor's ability to provide adequate support, so its absence may suggest a more measured and manageable operational pace.

Potential Mitigations

• A discussion with your business advisor can help evaluate whether a franchisor's growth rate is sustainable and supported by adequate infrastructure.
• Your accountant should review the franchisor's financial statements to assess if they have the resources to support their stated growth plans.
• It is wise to ask current franchisees about the quality and consistency of franchisor support, particularly if the system begins to grow more quickly.

Explanation

This risk was not identified. Nathan's Famous is a long-established brand, and the franchisor, Nathan's Famous Systems, Inc. (NFSI), has been franchising its Branded Menu Program since 2006. An established system generally reduces risks associated with unproven business models, a lack of brand recognition, and inexperienced management, which are common concerns with new franchise offerings.

Potential Mitigations

• When considering any franchise, it's wise to have a business advisor help you investigate the franchisor's history and the track record of its management team.
• For genuinely new systems, consulting an accountant to assess the franchisor's capitalization and financial stability is particularly important.
• Speaking with the earliest franchisees in any system can provide valuable insight into its development and the franchisor's learning curve.

Explanation

This risk was not identified. The Nathan's Famous brand, centered on classic American food items like hot dogs, has been in continuous operation since 1916. This long and successful history provides strong evidence of sustained consumer demand and indicates the business model is not based on a fleeting trend or fad, which is a key consideration for a long-term investment.

Potential Mitigations

• A business advisor can help you research the long-term market trends for any industry you consider entering.
• It is prudent to evaluate a concept's resilience to economic shifts and changing consumer tastes with your financial advisor.
• Reviewing a franchisor's history of innovation and adaptation can provide clues about its potential for long-term relevance.

Explanation

This risk was not identified. Item 2 of the FDD shows that the key executives at Nathan's Famous Systems, Inc. (NFSI) have extensive, long-term experience with the company and within the food service industry. An experienced and stable management team is a significant positive factor, as it suggests a deep understanding of the business, its operations, and franchisee relations.

Potential Mitigations

• Thoroughly vetting the management team's background and specific franchising experience is a crucial due diligence step a business advisor can assist with.
• Speaking with existing franchisees about the competence and responsiveness of the leadership team can offer valuable, real-world insight.
• Your attorney can help you understand the roles and responsibilities of the executives listed in Item 2.

Explanation

This risk was not identified. The FDD indicates the ultimate parent company, Nathan's Famous, Inc., is a publicly traded entity, not one owned by a private equity firm. This is an important distinction, as the ownership structure can influence a franchisor's priorities and timelines, affecting decisions on franchisee support, fees, and long-term system health.

Potential Mitigations

• Investigating the ownership structure of any franchisor is a key due diligence step to perform with your business advisor.
• If a franchisor is PE-owned, it's wise to research the firm's track record with other franchise systems they have owned or managed.
• Your attorney can help you assess how a franchisor's ownership might impact long-term strategy and franchisee relations.

Explanation

This risk was not identified. Item 1 of the FDD clearly outlines the corporate structure, identifying the parent companies of Nathan's Famous Systems, Inc. (NFSI). Since the ultimate parent is a publicly traded entity, its financial information is publicly accessible, and there is no indication that the corporate hierarchy is being obscured.

Potential Mitigations

• Verifying the full corporate structure with your attorney is important, especially if the direct franchisor entity appears to be thinly capitalized.
• An accountant can help you determine if a parent company's financial statements should have been included in the FDD based on FTC rules.
• If a parent company provides a guarantee, your attorney should review the guarantee document to understand its scope and limitations.

Explanation

The FDD discloses a complex ownership history for the affiliated "Arthur Treacher's" brand, which is also offered under this program. This history includes a predecessor's bankruptcy and multiple ownership changes. The franchisor also includes a disclaimer that it cannot independently verify all historical information. While the core Nathan's brand history is stable, this aspect introduces a minor element of uncertainty for those considering the Arthur Treacher's option.

Potential Mitigations

• A thorough review of the predecessor history disclosed in Item 1 with your attorney is important to understand any inherited risks.
• If considering the Arthur Treacher's brand, a discussion with your business advisor about the potential impacts of its convoluted history is recommended.
• Asking the franchisor for any additional clarifying information they might have regarding the predecessor history is a reasonable step.

Explanation

This risk was not identified. Item 3 discloses a single, minor regulatory action from 2006 related to a registration lapse, but it does not show a pattern of litigation with franchisees. The absence of significant lawsuits, particularly claims of fraud, misrepresentation, or breach of contract initiated by franchisees, is a positive indicator of the franchisor's relationship with its network.

Potential Mitigations

• Having your attorney carefully review the details of any disclosed litigation in Item 3 is a critical step in assessing a franchisor.
• A business advisor can help you research public records for any litigation that may not have been required to be disclosed.
• Speaking with current and former franchisees can provide context on the franchisor's relationship with its network and its approach to disputes.