Explanation

This specific risk was not identified in the FDD package. Rapid system growth can strain a franchisor's resources, potentially leading to inadequate support for individual franchisees. When a system expands too quickly, its ability to provide quality training, site selection assistance, and ongoing operational guidance may be compromised, impacting the entire network's performance and stability. Monitoring growth rates in Item 20 helps assess this risk.

Potential Mitigations

• During due diligence, it's wise to ask a business advisor to help evaluate a franchisor’s infrastructure and capacity for providing franchisee support.
• Engaging with a range of existing franchisees can provide insight into whether they feel the franchisor's support has kept pace with any system growth.
• An accountant can analyze a franchisor's financial statements to determine if they are reinvesting sufficiently in support systems.

Explanation

This specific risk was not identified in the FDD package. The business is a craft coffee cafe, which is a well-established industry segment rather than a fleeting trend. A fad business relies on novelty and can face a sharp decline in consumer interest once the trend passes. Investing in such a concept carries the risk that your business's long-term viability could be compromised, leaving you with contractual obligations long after public demand has faded.

Potential Mitigations

• A business advisor can help you conduct market research to assess the long-term consumer demand for a product or service beyond current trends.
• Inquiring with a franchisor about its plans for research, development, and system evolution can provide insight into its long-term vision.
• Your financial advisor can assist in evaluating a business model's resilience to shifts in consumer tastes and economic conditions.

Explanation

This risk was not identified in the FDD package, as there is no indication that Oromo Cafe is owned by a private equity firm. When a franchisor is PE-owned, there can be a focus on short-term profitability and a quick exit strategy. This might lead to decisions that benefit investors over the long-term health of franchisees, such as cutting support services or increasing fees. The franchise agreement might also permit the system to be sold easily.

Potential Mitigations

• Researching a private equity firm's history with other franchise brands can offer clues about its typical management style and priorities; a business advisor could assist.
• It's wise to ask existing franchisees about any changes they have experienced since a PE acquisition.
• Your attorney should review the assignment clause in the franchise agreement to understand how a sale of the system might affect you.

Explanation

This specific risk was not identified in the FDD package. A franchisor may be a subsidiary of a larger parent company. If the parent company provides essential services or financial backing, its own financial health is a material fact. Failing to disclose a parent or provide its financial statements when required can obscure the true stability and support structure of the franchise system, hiding potential risks from prospective franchisees.

Potential Mitigations

• An attorney can help investigate the corporate structure of the franchisor to identify any undisclosed parent or controlling entities.
• If a parent company exists and provides a guarantee, your accountant should ensure their financial statements are included and properly reviewed.
• Your business advisor can help assess the potential impact of a parent company's influence on the franchise system's operations.

Explanation

This specific risk was not identified in the FDD package. A franchisor must disclose information about its predecessors, which are prior entities from which it acquired the business concept. If this information is missing or incomplete, you might not be aware of a history of litigation, bankruptcy, or high franchisee turnover associated with the system under previous ownership. This can obscure a pattern of systemic problems that may still affect the brand.

Potential Mitigations

• Your attorney should carefully review Item 1 of the FDD for any mention of predecessors and their history.
• If a predecessor is identified, a business advisor can help you conduct independent research on its reputation and track record.
• Speaking with long-term franchisees who may have operated under a predecessor can provide invaluable historical context.

Explanation

This specific risk was not identified in the FDD package, as Item 3 discloses no material litigation. A pattern of lawsuits filed by franchisees against the franchisor alleging fraud or misrepresentation, or a high number of suits filed by the franchisor against franchisees, can be a major red flag. It may indicate systemic problems with the franchisor's sales practices, support obligations, or its relationship with its franchisees.

Potential Mitigations

• It is crucial for your attorney to thoroughly review the nature, allegations, and outcomes of all litigation disclosed in Item 3.
• A business advisor can help you understand if the volume or type of litigation is unusual for a franchise system of its size and age.
• Contacting franchisees involved in past or pending litigation can provide critical, first-hand information about their disputes.