Explanation

This specific risk was not identified in the FDD package. Rapid expansion can strain a franchisor's ability to provide adequate support, training, and quality control to its franchisees. A system growing too quickly may not have the infrastructure or capital to properly assist its new and existing locations, potentially harming the brand's reputation and individual unit success. Careful review of Item 20 growth patterns against Item 21 financials is key.

Potential Mitigations

• In any FDD, an accountant should evaluate the growth in unit numbers shown in Item 20 against the franchisor's financial capacity in Item 21.
• Engaging a business advisor to question existing franchisees about the quality and timeliness of support during growth phases is beneficial.
• Your attorney can help you ask the franchisor about their plans for scaling support services to match system growth.

Explanation

This risk was not identified, as the franchisor, Kahala Franchising, L.L.C. (Kahala), and its parent companies have a long operating history with many brands. For new systems, risks include an unproven business model, lack of brand recognition, and inexperienced management, which can lead to higher failure rates. It's crucial for prospective franchisees to assess the franchisor's experience in both the specific industry and in managing a franchise system.

Potential Mitigations

• When evaluating a new franchise system, your attorney should closely scrutinize the business and franchising experience of its management in Item 2.
• A business advisor can help assess the viability of a new concept and its potential for long-term success.
• An accountant should review the financials of a new franchisor to ensure it is adequately capitalized to support its initial growth.

Explanation

This risk was not identified, as the smoothie and health-food cafe industry has demonstrated sustained consumer demand. A fad business is one tied to a fleeting trend, which can create significant risk for franchisees who are locked into long-term agreements. When consumer interest wanes, the business may no longer be viable, but contractual obligations to pay fees remain, potentially leading to financial failure for the franchisee.

Potential Mitigations

• Your business advisor can help you conduct independent market research to assess the long-term consumer demand for any franchise's products or services.
• It is wise to evaluate the franchisor's plans for innovation and adaptation to changing market trends, often found in Item 11.
• An accountant can help you model the financial resilience of the business under different market scenarios.

Explanation

This risk was not identified in the FDD package. The executives listed in Item 2 have extensive experience in the franchising and restaurant industries. Inexperienced management can be a major risk, as they may lack the expertise to provide effective support, make sound strategic decisions, or manage the complexities of a franchise system. This can lead to operational inefficiencies and inadequate assistance for franchisees, impacting their potential for success.

Potential Mitigations

• In any franchise review, your business advisor should help you thoroughly vet the backgrounds of the key executives listed in Item 2.
• Speaking with current franchisees about their perception of management's competence and support is a crucial due diligence step.
• Your attorney can help assess whether the management team's experience aligns with the specific demands of the franchise system.

Explanation

The franchisor, Kahala, is a subsidiary of MTY Franchising USA, Inc., which acts as the Guarantor for performance. The FDD includes the parent company's audited financial statements as required. While this transparency is positive, your success is still linked to the financial health and strategic decisions of a larger corporate entity. Any financial distress at the parent level could impact the resources available to your specific brand, even if the franchisor entity itself seems stable.

Potential Mitigations

• Your accountant should carefully review the financials of both the franchisor and any guaranteeing parent entity.
• Having an attorney analyze the terms of the performance guaranty is crucial to understand its scope and limitations.
• It is wise to ask the franchisor about the operational relationship and flow of funds between it and its parent company.