Explanation

The franchise system is shrinking, not growing rapidly. Item 20 data shows a net loss of franchised units over the past three years. Therefore, the specific risks associated with a franchisor's support infrastructure being outpaced by excessively rapid growth were not identified in this FDD package. Rapid growth can strain a franchisor's ability to provide adequate training, site selection assistance, and ongoing support, which is an important factor to consider in other franchise opportunities.

Potential Mitigations

• When evaluating any franchise, your business advisor can help assess whether the franchisor's support team and resources are adequate for its current and projected size.
• Your accountant should always review the franchisor's financials in Item 21 to see if they are investing in support infrastructure in line with system growth.
• It's wise to ask current franchisees about the quality and timeliness of the support they receive from the franchisor.

Explanation

This risk was not identified. Kahala Franchising, L.L.C. (Kahala) and its parent companies have a long operational history and manage a large portfolio of established brands, so this is not a new or unproven system. Evaluating a new franchisor's track record is crucial because they may lack refined operational systems, brand recognition, and the experience needed to provide effective franchisee support, increasing the overall investment risk for early adopters.

Potential Mitigations

• For any emerging franchise system, it is crucial that your business advisor help you conduct extensive due diligence on the founders' industry and franchising experience.
• Your accountant should carefully assess the capitalization of a new franchisor to ensure it has sufficient funds for growth and support.
• Seeking legal counsel from a franchise attorney is advisable to negotiate terms that may offer greater protection when investing in an unproven system.

Explanation

The frozen yogurt concept has been established for many years and is not a new trend. However, the business is highly competitive, and its success depends on sustained consumer interest and market trends. The franchisor's extensive portfolio of other dessert concepts, including some that are similar to Pinkberry, could influence its long-term focus and support for this specific brand if market preferences shift. Evaluating long-term consumer demand is an important part of your due diligence.

Potential Mitigations

• Your business advisor can help you research current consumer trends and the long-term market outlook for frozen yogurt businesses in your specific area.
• It is wise to ask the franchisor about their plans for innovation and brand evolution to maintain relevance in a competitive market.
• A financial advisor can help you create financial models that account for potential fluctuations in consumer demand over the life of the franchise.

Explanation

The risk of inexperienced management was not identified. The executives listed in Item 2 have extensive experience managing Kahala Franchising, L.L.C. (Kahala) and its large portfolio of affiliated franchise brands. In any franchise evaluation, it is vital to assess management's background. A lack of experience in both the specific industry and in franchising can lead to strategic errors, weak support systems, and poor franchisee relations, significantly increasing your investment risk.

Potential Mitigations

• A business advisor can help you research the backgrounds of the key executives of any franchisor you consider.
• Always ask existing franchisees about their perception of management's competence and the quality of support they provide.
• Your franchise attorney can help you understand the implications of management's experience on the franchise relationship.

Explanation

The FDD discloses the ultimate parent company, MTY Food Group Inc., and the direct parent, MTY Franchising USA, Inc., which guarantees the franchisor's performance. The parent's audited consolidated financial statements are provided. This level of transparency is positive. A risk would arise if a franchisor failed to disclose a parent that provides essential services or financial backing, as this would obscure a complete view of the system's stability and resources, a key element of due diligence.

Potential Mitigations

• Your franchise attorney should always verify that the FDD properly discloses all parent and affiliate entities that are material to the franchise system.
• If a parent guarantee is provided, ask your attorney to review its terms to understand the scope and limitations of the protection it offers.
• An accountant's review of parent company financials, when provided, is essential to assess the overall health of the entire corporate structure.

Explanation

This risk was not identified. The FDD appears to disclose the franchisor's predecessors and provides information on litigation involving them. When evaluating a franchise, it is important to scrutinize the history of any predecessors. A failure to disclose them, or a history of litigation, bankruptcy, or high franchisee turnover under their management, could indicate unresolved systemic issues or liabilities that have been passed on to the current franchisor, affecting the health of the system you are joining.

Potential Mitigations

• A franchise attorney should always carefully review Item 1, 3, and 4 for any information regarding predecessors.
• If a system was acquired from a predecessor, your business advisor can assist in researching the predecessor's public track record and reputation.
• When speaking with long-term franchisees, asking about their experience under previous ownership can provide valuable insight.