Explanation

As this is a very new franchise system with only one franchised outlet open at the end of 2024, there is no history of franchisee turnover to analyze. While this specific risk is not present, a lack of operating history for franchised units means there is no track record to evaluate for potential systemic issues or franchisee satisfaction.

Potential Mitigations

• It is crucial to speak with the single franchisee listed in Exhibit E to understand their early experiences with the system.
• A business advisor can help you assess the risks inherent in joining a new system with no established history of franchisee success.
• Your attorney should review the termination and renewal clauses in the Franchise Agreement to understand your future rights and obligations.

Explanation

This risk was not identified, as the franchise system is new and growing very slowly, not rapidly. Rapid growth can strain a franchisor's ability to provide adequate support. While not a current risk, you should monitor the franchisor's growth plans to ensure they align with their capacity to support new units in the future.

Potential Mitigations

• In your discussions with the franchisor, ask about their strategic growth plans for the next several years.
• A business advisor can help you evaluate whether the franchisor's support infrastructure seems prepared for future expansion.
• Consult your attorney on any territorial development rights to understand how future growth might affect your market.

Explanation

The risk of the business being a short-lived fad was not identified. Gelato and coffee are well-established product categories with long histories of consumer demand. The core business concept has been in operation for over a decade, suggesting a sustainable market rather than a temporary trend.

Potential Mitigations

• A business advisor can help you research local market demand for high-quality gelato and coffee to validate the concept's appeal in your area.
• You should review the franchisor's plans for product innovation and adaptation to ensure long-term market relevance.
• Engage your accountant to create financial projections based on sustained demand rather than short-term novelty.

Explanation

This risk was not identified, as the franchisor appears to be owned by its founding individuals rather than a private equity firm. Private equity ownership can sometimes lead to a focus on short-term profits over the long-term health of the franchise system.

Potential Mitigations

• It is still wise to ask your attorney to review the franchise agreement for any clauses that would allow the franchisor to easily sell the system.
• Discussing the long-term vision for the brand with the current owners can provide valuable insight.
• A business advisor can help you research the background and reputation of the individual owners.

Explanation

The franchisor does not disclose the existence of a parent company. In some cases, a weak franchisor may be supported by a financially stronger parent. The absence of a parent company here means the franchisor's own financial stability, which is limited, is the sole basis for its ability to support you.

Potential Mitigations

• Your accountant's review of the franchisor's financials is especially critical, as there is no parent company to provide a financial backstop.
• Your attorney should confirm the corporate structure and the absence of any undisclosed controlling entities.
• Understanding the financial health of the franchisor's affiliates, especially the sole supplier, is important; discuss this with a business advisor.

Explanation

The franchisor does not disclose any predecessors in Item 1. This means you are evaluating a new franchise system without a prior iteration under a different owner. This avoids risks from inherited issues but reinforces the risks associated with a new, unproven system.

Potential Mitigations

• A business advisor can help you research the history of the underlying "Pitango Gelato" brand, even though it wasn't a franchise.
• Your attorney should confirm that no other entities meet the legal definition of a predecessor for this system.
• Focus your due diligence on the experience of the current management team and the performance of their affiliated stores.

Explanation

The FDD discloses no litigation history involving the franchisor, its management, or predecessors. This is a positive sign, although it is also expected for a very new franchise system with a limited operating history and only one franchisee. The absence of litigation does not guarantee future disputes will not arise.

Potential Mitigations

• Your attorney can conduct independent searches for litigation that may not have been required to be disclosed.
• It is still important for your attorney to review the dispute resolution clauses in the franchise agreement to understand how future conflicts would be handled.
• Discussing any informal disputes with the current franchisee is a key part of due diligence.