Explanation

This risk was not identified in the FDD Package. Item 20 data does not show any terminations, non-renewals, or other cessations of business for the past three years. Generally, high franchisee turnover is a critical red flag, as it may signal systemic problems like unprofitability, franchisee dissatisfaction, or poor franchisor support. The absence of such turnover in the data is a positive indicator, though the system is still very young.

Potential Mitigations

• It is still wise to discuss the business experiences of current franchisees to gauge their satisfaction and future intentions.
• Your business advisor can help you monitor future Item 20 reports for any changes in turnover trends as the system matures.
• An attorney can help you formulate questions for current franchisees about their relationship with the franchisor.

Explanation

This risk was not identified in the FDD Package. The business model, selling custom clothing and accessories, operates in an established market and is not based on a short-term trend or fad. The long-term viability of a franchise is crucial, as fads can disappear, leaving you with a worthless business but still bound by a long-term franchise agreement.

Potential Mitigations

• A business advisor can help you research the long-term stability and competitive landscape of the custom clothing industry.
• In discussions with current franchisees, you can ask about the sustainability of customer demand and the brand's market position.
• Your accountant can help you model financial scenarios based on potential shifts in fashion and consumer spending.

Explanation

This risk was not identified in the FDD Package. Item 1 indicates the franchise is founder-led and does not disclose any ownership by a private equity firm. When PE firms own franchisors, there can be a risk that they prioritize short-term returns for their fund over the long-term health of the franchisees, which could lead to increased fees or reduced support.

Potential Mitigations

• Your attorney can confirm the ownership structure and verify the absence of any undisclosed controlling entities.
• It is good practice to ask about the franchisor's long-term ownership plans during due diligence.
• A business advisor can help you understand the potential pros and cons of different franchisor ownership structures.

Explanation

This risk was not identified in the FDD package. Item 1 does not disclose a parent company, and no information suggests this disclosure is incomplete. If a franchisor is a subsidiary of a larger parent, the parent's financial health can be critical, and its financials may be required for a full risk assessment. The absence of a parent company simplifies the due diligence process.

Potential Mitigations

• Your attorney can perform a corporate search to confirm the franchisor's standalone status.
• Understanding the full corporate structure is a key piece of due diligence your accountant and attorney should verify.
• Always ensure that if a parent company exists and guarantees obligations, its financial statements are provided and reviewed.

Explanation

This risk was not identified in the FDD package. Item 1 does not list any predecessor entities from which the franchisor acquired its business. A predecessor's history, including any past litigation, bankruptcies, or high franchisee turnover, can provide important insights into the historical health and challenges of the business system. The absence of a predecessor means the franchisor's own short history is the sole track record.

Potential Mitigations

• Your attorney should confirm the information in Item 1 regarding the franchisor's formation and history.
• Since there is no predecessor, focusing due diligence on the current franchisor's short track record is even more critical.
• A business advisor can help you analyze the risks associated with a business that does not have a longer history through a predecessor.

Explanation

This risk was not identified in the FDD package. Item 3 states that there is no material litigation required to be disclosed. A pattern of litigation, particularly claims of fraud or breach of contract brought by franchisees, is a major red flag that can indicate systemic problems within a franchise. The absence of such litigation is a positive sign, although the system's youth means there has been less time for disputes to arise.

Potential Mitigations

• Your attorney can conduct an independent search for any litigation that may not have met the threshold for disclosure in Item 3.
• During discussions with current and former franchisees, it is always prudent to ask about any disputes they have had with the franchisor.
• Understanding the dispute resolution process in Item 17 is important even in the absence of current litigation.