Explanation

This risk was not identified, as Item 20 shows there have been no franchised outlets operating in the last three years. Therefore, there is no turnover data to analyze. A lack of operating franchisees is itself a significant risk, indicating an unproven system, which is addressed in the 'New/Unproven Franchise System' risk.

Potential Mitigations

• Your business advisor should help you investigate why the previous franchise system ceased operating and what has changed.
• Ask your attorney to determine if you can contact anyone who may have been a franchisee prior to the three-year period covered in Item 20.
• An accountant can help you model the financial risks of joining a system with no current franchisee performance data.

Explanation

This risk was not identified in the FDD package. Item 20 data indicates that the franchise system has had no active franchisees in the past three years, so there has been no growth, rapid or otherwise. Rapid growth can strain a franchisor's ability to provide adequate support to all its franchisees.

Potential Mitigations

• During due diligence, a business advisor can help you evaluate a franchisor's plans for future growth and their capacity to support it.
• In discussions with existing franchisees of any system, it is wise to ask about the quality and timeliness of franchisor support.
• An attorney can review the franchise agreement for specific support commitments from the franchisor.

Explanation

This risk was not identified. The franchise is for an upscale Neapolitan Italian restaurant, which is a classic and established dining concept rather than a business based on a potentially short-lived trend. A fad business model presents a risk that customer demand may disappear, leaving you with a long-term contract for an obsolete concept.

Potential Mitigations

• A business advisor can help you research long-term consumer demand and market trends for any industry you consider entering.
• Your attorney can review the franchise agreement to understand your obligations if you need to pivot the business model.
• With an accountant, you should assess the long-term financial viability of any business concept beyond its current popularity.

Explanation

This risk was not identified. Item 2 indicates that the key executives from the Scognamillo family have extensive, long-term experience operating the original Patsy's Italian Restaurant, with some executives having been involved since the 1970s and 1980s. While their franchising-specific experience is less detailed, they are not inexperienced in the core restaurant business itself.

Potential Mitigations

• It is always prudent to have a business advisor help you research the background and track record of a franchisor's key management team.
• Speaking with current franchisees can provide insight into the management team's competence and effectiveness.
• Your attorney can help you understand the franchisor's contractual obligations for providing support and guidance.

Explanation

This risk was not identified in the FDD package. Item 1 indicates the franchisor and its affiliates are private companies controlled by the Scognamillo family, not a private equity firm. Private equity ownership can sometimes lead to a focus on short-term profits and cost-cutting in franchisee support over the long-term health of the brand.

Potential Mitigations

• A business advisor can help you research the ownership structure of any franchise system you are considering.
• If a franchisor is owned by a private equity firm, your attorney should review the assignment clauses in the franchise agreement carefully.
• It is wise to speak with franchisees of a PE-owned system about any changes in support or fees since the acquisition.

Explanation

This risk was not identified. Item 1 and Item 21 clearly disclose the relationship between the franchisor and its key affiliates, Patsy's Brand, Inc. and Patsy's Italian Restaurant, Inc. While the franchisor entity is financially weak and dependent on these affiliates, this dependence is disclosed. A failure to disclose a parent company can hide the true financial stability and control structure of a franchise system.

Potential Mitigations

• An attorney can help you understand the legal relationships between a franchisor and its parent or affiliate companies.
• If a parent company guarantees the franchisor's obligations, your accountant should review the parent's financial statements.
• A business advisor can help assess the operational risks if a franchisor is heavily reliant on its affiliates.