Explanation

This risk was not identified in the FDD package, as there are no existing or former U.S. franchisees from whom to gather turnover data. High franchisee turnover in an established system can be a major red flag indicating potential systemic problems such as a lack of profitability or inadequate support. The absence of this data makes it impossible to assess this specific risk, but underscores the newness of the U.S. franchise system.

Potential Mitigations

• Your business advisor should help you analyze the parent company's franchisee turnover rates for its Canadian New York Fries operations as a potential proxy.
• A thorough review of the franchisor's support systems and financial stability with your accountant is critical, given the lack of a U.S. franchisee track record.
• It is advisable to consult with your attorney regarding the heightened risks associated with being one of the first franchisees in a new system.

Explanation

This risk was not identified in the FDD package. While the franchise system is new to the U.S., the number of projected new outlets is not indicative of excessively rapid growth that might outstrip support capabilities. In more mature systems, rapid expansion can sometimes strain a franchisor's resources, leading to diminished quality of training, site selection assistance, and ongoing operational support for all franchisees, which could negatively impact your business.

Potential Mitigations

• Asking the franchisor about their specific plans for scaling support infrastructure to match their U.S. growth projections is a wise step to take with your business advisor.
• An accountant can review the franchisor's financial statements to help you assess whether they appear to have the capital resources to support their stated growth plans.
• Your attorney can help you understand the support commitments detailed in the Franchise Agreement to ensure they are sufficient.

Explanation

This risk was not identified in the FDD package. New York Fries is a well-established concept that has been operating in Canada since 1984, specializing in a core food item with enduring popularity. While market tastes can change, the business model is not based on a recent or fleeting trend. A fad-based business can be a significant risk, as its decline in popularity could leave you with a worthless investment and ongoing liabilities.

Potential Mitigations

• It is still prudent to conduct your own local market research with a business advisor to assess long-term consumer demand for this type of quick-service food concept in your area.
• Reviewing the franchisor's history of product innovation and adaptation in the Canadian market can provide insight into their ability to evolve over time.
• An accountant can help you model the financial resilience of the business under various economic scenarios and competitive pressures.

Explanation

The FDD discloses that the franchisor entity, Recipe Unlimited US, LLC (Recipe), is a subsidiary of Recipe Unlimited Corporation. In this case, the FDD appropriately includes the parent's financial statements and a guaranty of performance from the parent. This transparency mitigates the risk of non-disclosure. In other situations, if a franchisor fails to disclose a parent company or its financials when required, it can obscure the true financial backing and stability of the system, creating significant hidden risks for a prospective franchisee.

Potential Mitigations

• Your accountant should review the provided parent company financial statements to assess the overall health of the entity guaranteeing the franchisor's obligations.
• A thorough review of the parent guaranty in Exhibit A-2 with your attorney is essential to understand the scope and limitations of the protection it offers.
• Confirming the legal relationship between the franchisor and its parent with your attorney ensures clarity on who is ultimately responsible for performance.

Explanation

This risk was not identified in the FDD package. The franchisor, Recipe Unlimited US, LLC (Recipe), was formed in 2021 and states it has no predecessors. In cases where a franchisor has acquired a system from a predecessor, it is important to review the predecessor's history for issues like litigation, bankruptcy, or high franchisee failure rates, as these could indicate inherited problems that may continue to affect the system under new ownership.

Potential Mitigations

• Although no predecessor is listed, asking long-term employees or Canadian franchisees about the brand's history may reveal relevant information; a business advisor can help frame these questions.
• An attorney can confirm the corporate history to ensure no predecessor information has been omitted.
• Independent online research into the brand's history can sometimes uncover information about prior ownership structures or related entities.