Explanation

This risk was not identified, as the franchisor is new and has no history of franchised outlets. Item 20 shows no terminations, non-renewals, or other cessations. For established systems, high turnover is a major red flag, often indicating systemic problems like unprofitability or poor support. You should monitor this data in future FDDs if you become a franchisee.

Potential Mitigations

• With an established system, it's vital your accountant analyzes Item 20 data to calculate the true turnover rate over three years.
• A key due diligence step is to contact former franchisees listed in Item 20 to understand why they left, a process your attorney can guide.
• Discussing turnover trends and the reasons behind them with your business advisor can reveal crucial insights about system health.

Explanation

This risk was not identified in the FDD Package, as Item 20 shows the franchise system is new with no existing franchisees. Rapid growth in an established system can be a concern if the franchisor's support infrastructure does not keep pace. This can lead to diluted support, poor site selection, and inadequate training for new franchisees entering the system.

Potential Mitigations

• Your business advisor can help evaluate if a rapidly growing franchisor's support systems are scaling appropriately.
• Speaking with both new and tenured franchisees can provide your attorney with a clearer picture of support quality during growth phases.
• An accountant's review of the franchisor's financial investment in support staff and infrastructure is critical in these situations.

Explanation

This risk was not identified in the FDD Package. Item 1 indicates the company is a limited liability company and does not mention any ownership by a private equity firm. This type of risk is important to consider because PE ownership can sometimes lead to a focus on short-term profits over the long-term health of the franchise system and its franchisees.

Potential Mitigations

• For other FDDs, your attorney should research the ownership structure to identify any private equity involvement.
• A business advisor can help investigate a PE firm's track record with other franchise brands they have owned.
• It's wise to ask existing franchisees of a PE-owned brand about any changes in support or fees since the acquisition.

Explanation

This risk was not identified, as Item 1 of the FDD clearly states, "We have no parent or predecessor company." In some franchise systems, the franchisor entity is a subsidiary of a larger parent company. In such cases, it's critical to understand the financial health and obligations of the parent, as it can significantly impact the stability and support offered by the franchisor.

Potential Mitigations

• Your attorney should always verify the corporate structure described in Item 1 to ensure all parent companies are disclosed.
• If a parent company exists and provides a guarantee, an accountant must review the parent's financial statements for stability.
• Understanding the legal relationship and obligations between a parent and a franchisor subsidiary is a key task for your attorney.

Explanation

This risk is not present in the FDD, as Item 1 clearly states that the franchisor has no predecessor. When a franchisor has acquired the system from a predecessor, it is important to investigate the predecessor's history regarding litigation, bankruptcy, and franchisee relations. This history can provide valuable insight into potential inherited problems within the franchise system that may not be immediately apparent.

Potential Mitigations

• When a predecessor is listed in Item 1, your attorney should carefully review Items 3 and 4 for any related litigation or bankruptcy history.
• A business advisor can assist in researching the predecessor's reputation and track record through news archives or online searches.
• If possible, speaking with long-term franchisees who operated under the predecessor can provide invaluable context.

Explanation

This risk was not identified in the FDD Package. Item 3 states that there is no litigation that requires disclosure. For other franchise systems, a pattern of lawsuits filed by franchisees alleging fraud or by the franchisor against franchisees for contract breaches can be a significant red flag. It may indicate systemic issues, an overly aggressive franchisor, or widespread franchisee dissatisfaction.

Potential Mitigations

• When litigation is disclosed in Item 3, your attorney must analyze the nature, frequency, and outcomes of the cases.
• Independent research on disclosed lawsuits can provide your legal counsel with context beyond the FDD's summary.
• A high volume of franchisor-initiated lawsuits against franchisees should be discussed with your business advisor as a potential sign of a poor relationship.