Explanation

This specific risk was not identified in the FDD package. Rapid system growth can be a concern if a franchisor's support infrastructure does not keep pace, potentially leading to a decline in the quality of training, site selection assistance, and ongoing operational support for franchisees. It can strain resources and dilute brand standards if not managed carefully.

Potential Mitigations

• It's a good practice to ask the franchisor about their strategic growth plans and how they intend to scale support systems.
• Engaging a business advisor to review the franchisor's disclosed growth in Item 20 against its financial capacity in Item 21 is a prudent step.
• Speaking with franchisees who joined at different times can provide insight into whether support levels have remained consistent during growth phases.

Explanation

This specific risk was not identified in the FDD package. A fad business is one tied to a fleeting trend, which can be a significant risk for a long-term investment like a franchise. Even if the trend disappears, your contractual obligations, such as royalty payments, continue for the full term. Assessing whether a concept has long-term consumer demand versus being a short-lived novelty is a crucial part of due diligence.

Potential Mitigations

• A business advisor can help you research the industry to assess the long-term sustainability of consumer demand for the products or services.
• Reviewing the franchisor's plans for innovation, product development, and adaptation in Item 11 can provide insight into their long-term vision.
• Analyzing market trends with a marketing professional can help distinguish a durable business model from a temporary fad.

Explanation

This specific risk was not identified in the FDD package. The management team described in Item 2 appears to have relevant experience in the restaurant industry and franchising. In general, a franchisor with an inexperienced management team poses a risk because they may lack the expertise to provide effective support, manage system growth, or make sound strategic decisions, which can negatively impact franchisee success.

Potential Mitigations

• It's always wise to research the backgrounds of the key executives listed in Item 2 to verify their industry and franchise-specific experience.
• Asking existing franchisees about their direct experiences with the management team's competence and support is a valuable due diligence step.
• A business advisor can help you evaluate the collective experience of the management team in the context of the franchise system's size and goals.

Explanation

The FDD does not indicate that the franchisor is owned by a private equity firm. This type of ownership can present unique risks, as PE firms often have specific investment timelines and may prioritize short-term returns. This can sometimes lead to decisions like rapid expansion, cost-cutting in franchisee support, or a sale of the franchise system, which could affect the long-term health and stability of the brand.

Potential Mitigations

• A business advisor can help you investigate the ownership structure of the franchisor and any parent companies.
• If a franchisor is PE-owned, it's prudent to research the firm's track record with other franchise brands they have managed.
• Your attorney should carefully review any clauses in the Franchise Agreement that pertain to the sale or transfer of the franchise system itself.

Explanation

This specific risk was not identified in the FDD package. A franchisor's predecessor is a prior entity from which it acquired the business. Failing to disclose or providing incomplete information about a predecessor's history, including any past litigation, bankruptcies, or high franchisee turnover, can obscure a pattern of systemic problems that may still affect the franchise system you are considering joining.

Potential Mitigations

• A careful review of Item 1 of the FDD with your attorney is necessary to identify any mention of predecessors.
• If a predecessor is identified, a business advisor can help you conduct independent research into its history and reputation.
• When speaking with long-term franchisees, asking about their experience under any previous ownership can provide valuable context.

Explanation

The FDD states that no litigation is required to be disclosed. While this is positive, it is important to remember that this only covers litigation meeting specific disclosure criteria. A lack of disclosed litigation does not guarantee a dispute-free system, but it does mean there is no reported history of the most serious types of legal actions involving the franchisor.

Potential Mitigations

• You should still perform your own due diligence by searching online for news articles or other information about the franchisor and its management.
• Discussing any concerns or disputes with current and former franchisees can provide a more complete picture of the franchisor relationship.
• Your attorney can advise on how to interpret the absence of litigation and what other due diligence steps are prudent.