Explanation

This risk was not identified in the FDD package. The audited financial statements for Paisano's Franchise System, Inc. (Paisano's) show it to be profitable with a strong balance sheet. Financial instability can jeopardize a franchisor's ability to support its franchisees, so a healthy financial state is a positive indicator for prospective franchisees.

Potential Mitigations

• An experienced franchise accountant should always review the franchisor's financial statements, including all footnotes and the auditor's report.
• It is wise to have your accountant assess trends in revenue sources, profitability, and cash flow over the past three years.
• Discussing the franchisor's financial health and capitalization with a business advisor provides valuable context for your investment decision.

Explanation

This risk was not identified. The outlet summary tables in Item 20 do not show a high rate of franchisee terminations, non-renewals, or other cessations. Instead, the data indicates system growth, including the refranchising of several company-owned stores to new franchisees. High turnover can signal systemic problems, so its absence is a positive sign.

Potential Mitigations

• Your business advisor can help you analyze the franchisee turnover data in Item 20 for any concerning trends.
• Contacting current and former franchisees from the lists in the FDD is a crucial step to verify their satisfaction with the system.
• Asking your attorney to help you formulate questions for former franchisees can provide insight into why they left the system.

Explanation

This risk was not identified in the FDD package. Item 1 indicates the franchisor's affiliates have operated similar outlets since 1998, and the franchisor has been offering franchises since 2009, indicating a mature and established business model. An unproven system presents higher risks, so an established track record is a positive factor.

Potential Mitigations

• A business advisor can help you evaluate the franchisor's history and the track record of its management team.
• You should always investigate the operating history of the specific business concept and the franchise system itself.
• Contacting some of the earliest franchisees in the system can provide valuable long-term perspective on the brand's viability.

Explanation

This risk was not identified in the FDD package. The franchise operates in the pizza restaurant industry, which is a well-established and enduring market segment rather than a short-term trend. Investing in a fad business carries the risk of declining consumer interest, which could jeopardize the long-term viability of the investment.

Potential Mitigations

• A business advisor can help you assess the long-term market demand and sustainability of any franchise concept.
• It is prudent to research the industry to understand its life cycle, competitive landscape, and potential for future growth.
• Consider the business's adaptability to changing consumer tastes and economic conditions with your financial advisor.

Explanation

This risk was not identified in the FDD package. Item 2 shows that the key executives of the franchisor have extensive experience, with over 25 years in the restaurant and franchise industry. Inexperienced management can be a significant liability for a franchise system, so a seasoned leadership team is a positive indicator.

Potential Mitigations

• It is always a good practice to review the biographies of the franchisor's key personnel in Item 2 with a business advisor.
• Asking current franchisees about their perception of the management team's competence and support is a valuable due diligence step.
• Your attorney can help you understand the roles and responsibilities of the management team as outlined in the disclosure documents.

Explanation

This risk was not identified in the FDD package. The disclosures in Item 1 do not indicate that the franchisor is owned or controlled by a private equity firm. Private equity ownership can sometimes lead to a focus on short-term returns over the long-term health of the brand, so its absence can be a neutral or positive factor.

Potential Mitigations

• Your attorney can help you investigate the ownership structure of the franchisor to identify any controlling entities.
• If a franchisor is owned by a private equity firm, a business advisor can help you research that firm's track record with other brands.
• It is important to understand the ownership structure and any potential plans for a future sale of the franchise system.

Explanation

This risk was not identified in the FDD package. Item 1 describes affiliated companies but does not mention a parent company. The provided financial statements in Item 21 are for the franchisor entity itself. The lack of a parent can be a risk if the franchisor is weak, but here the franchisor appears financially strong on its own.

Potential Mitigations

• An accountant should always review the provided financial statements to assess the stand-alone viability of the franchisor entity.
• Your attorney can help you understand the relationship between the franchisor and any disclosed affiliates.
• If a parent company exists and provides a guarantee, it is crucial for your accountant to review the parent's financial statements as well.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD does not disclose any predecessor entities from which the franchisor acquired its assets or that previously offered franchises for this system. A history with predecessors could carry baggage, so the absence of one is a neutral factor.

Potential Mitigations

• Always have your attorney review Item 1 carefully for any mention of predecessors and their history.
• If a predecessor is disclosed, it's important to research their litigation and bankruptcy history in Items 3 and 4.
• A business advisor can help you investigate the history and reputation of any disclosed predecessor.