Explanation

This specific risk was not identified in the FDD package. High franchisee turnover, often revealed in Item 20, can be a major red flag indicating systemic problems such as low profitability, franchisee dissatisfaction, or a flawed business model. A stable or growing system with low turnover is generally a positive sign for prospective franchisees.

Potential Mitigations

• An analysis of the tables in Item 20 with your accountant can help you calculate the annual franchisee turnover rate.
• Speaking with former franchisees listed in the FDD is a critical step your business advisor might recommend to understand why they left the system.
• Your attorney can help you formulate questions for the franchisor about any trends in franchisee departures.

Explanation

This risk was not identified in the provided FDD package. While growth is often positive, extremely rapid expansion can sometimes stretch a franchisor's support systems thin, potentially leading to inadequate training, site selection assistance, and ongoing operational support for new franchisees. A sustainable, managed growth rate is often a healthier indicator for a franchise system.

Potential Mitigations

• Your business advisor can help evaluate if the franchisor's support infrastructure, as described in Item 11, is sufficient for its growth rate.
• Discussing the quality and responsiveness of franchisor support with existing franchisees provides valuable real-world insight.
• An accountant should review the franchisor's investments in support staff and systems in proportion to its expansion.

Explanation

This specific risk was not identified in the FDD package. Investing in a new or unproven franchise system carries higher risk because the business model may not be time-tested, brand recognition is minimal, and the franchisor may lack the experience to provide effective support. Such systems often have limited operating history and a small number of franchisees to contact for due diligence.

Potential Mitigations

• A thorough investigation of the management team's prior experience in franchising should be conducted with the help of your business advisor.
• Your attorney can help you negotiate more franchisee-favorable terms to compensate for the higher risk of joining an unproven system.
• An accountant's review of the startup's capitalization is crucial to determine if it has sufficient funds to support its initial growth phase.

Explanation

This risk was not identified in the FDD package. A business concept tied to a short-term trend or fad can be risky, as consumer interest may decline, leaving you with a long-term franchise agreement for an obsolete business. It's important to assess if the product or service has sustainable, long-term market demand beyond current popularity.

Potential Mitigations

• A business advisor can assist you in researching the long-term market trends for the industry to gauge sustainability.
• Evaluating the franchisor's commitment to research and development, as described in Item 11, can reveal its plans for evolving the concept.
• Consider the business's resilience to economic shifts and changing consumer tastes with your financial advisor.

Explanation

This risk was not identified in the provided FDD. A franchisor's management team lacking experience in the specific industry or in franchising can be a significant concern. Inexperience may lead to flawed strategies, weak operational support, and an inability to effectively guide franchisees, regardless of how promising the business concept may seem.

Potential Mitigations

• Your business advisor can help you investigate the backgrounds of the key executives listed in Item 2 of the FDD.
• Interviewing current franchisees about their perception of the management team's competence and support is a critical due diligence step.
• Your attorney might suggest inquiring if the franchisor has engaged experienced outside consultants to compensate for internal inexperience.

Explanation

This risk was not identified in the FDD package. When a franchise is owned by a private equity firm, there may be a focus on short-term profitability and a quick exit strategy over the long-term health of the brand and its franchisees. This can sometimes lead to reduced support, increased fees, or pressure to cut costs in ways that harm individual unit profitability.

Potential Mitigations

• A business advisor can help you research the private equity firm's reputation and its track record with other franchise brands it has owned.
• Discussing any changes in the system since the private equity acquisition with current franchisees is an important due diligence measure.
• Your attorney should review the assignment clauses in the Franchise Agreement to understand the implications of the system being sold again.

Explanation

This specific risk was not identified in the FDD package. Sometimes a franchisor is a subsidiary of a larger parent company. If the parent company's financial information is not disclosed, you may lack a full picture of the overall financial health and resources backing your franchise system, especially if the franchisor entity itself is thinly capitalized.

Potential Mitigations

• Your attorney can help determine if a parent company exists and whether its financial statements should have been included under franchise disclosure rules.
• An accountant's analysis is crucial to understand any financial guarantees or support provided by a parent company to the franchisor.
• It is wise to ask the franchisor to clarify the relationship and financial interdependencies with any parent company.