Explanation

This specific risk was not identified. The audited financial statements for Chicago's Pizza Franchising, Inc. Corp. (Pizza Twist Franchising) show consistent profitability from 2021-2023, growing revenue, and a healthy balance sheet with positive and increasing shareholders' equity. These are positive indicators of financial stability. However, it is always crucial for a prospective franchisee to have an accountant review the financials for any underlying nuances that might suggest future instability.

Potential Mitigations

• An experienced franchise accountant should still conduct a thorough review of the audited financial statements, including all footnotes and cash flow statements, to form an independent opinion.
• Engaging a business advisor to discuss the franchisor's financial strategy and its reliance on franchise fees versus ongoing royalties can provide valuable context.
• It is prudent to have your attorney verify that the franchisor is in compliance with any state financial assurance requirements, if applicable.

Explanation

This risk was not identified. The data in Item 20 tables indicates a very low rate of franchise closures and no terminations or non-renewals over the last three years. The system has experienced significant growth in the number of outlets, while the number of units that 'Ceased Operations for Other Reasons' remains minimal relative to the system's size. This suggests a stable franchisee base during this period.

Potential Mitigations

• A conversation with your business advisor about the reasons for the few closures listed could provide additional insight.
• Asking a significant number of current and former franchisees about their experiences can help validate the positive impression given by the Item 20 data.
• Your accountant should still review the three-year trend data to confirm the low turnover rates and assess system stability.

Explanation

This risk was not identified. The business model, centering on pizza with specialized Indian cuisine options, has been in operation through affiliates since 2014 and as a franchise since 2017. While niche concepts can sometimes be fads, the underlying product is pizza, which has sustained, long-term consumer demand. The unique 'twist' appears to be a market differentiator rather than a temporary trend, but its long-term mass-market appeal remains a business consideration.

Potential Mitigations

• Assessing the long-term consumer demand for this specific pizza concept in your local market is a key task to undertake with a business advisor.
• Evaluating the franchisor's plans for menu innovation and adaptation to changing consumer tastes is a worthwhile discussion to have.
• Your financial advisor can help you analyze the business model’s resilience to economic shifts beyond any current novelty.

Explanation

This specific risk was not identified. The key executives listed in Item 2 have been with the company since its early stages and possess prior experience in the pizza industry through affiliated companies dating back to 2014. The Director of Operations also has prior experience as a franchisee in a different system. While the franchise system itself is relatively young, the management team does not appear to be inexperienced in the core business.

Potential Mitigations

• A thorough vetting of the management team's specific experience in supporting a rapidly growing franchise system should be discussed with your business advisor.
• Speaking with existing franchisees about the quality of management's guidance and support is a critical due diligence step.
• Your attorney can help you frame questions for the franchisor about their management philosophy and structure.

Explanation

This risk was not identified in the FDD package. Item 1 indicates the franchisor does not have a parent entity and does not mention any ownership by a private equity firm. Business ownership structures can change, and private equity ownership can introduce a focus on short-term returns which may not always align with the long-term health of franchisees. This can sometimes lead to increased fees or reduced support.

Potential Mitigations

• Asking the franchisor directly about their long-term ownership structure and any plans for a future sale can provide insight.
• Your attorney should review the assignment clauses in the Franchise Agreement to understand your rights if the system is sold.
• A business advisor can help you research the franchisor's ownership and any potential ties to investment firms.

Explanation

This risk was not identified. Item 1 clearly discloses the affiliate structure, including the IP holding company and the affiliated supplier, AFI. The franchisor's own audited financials are provided in Item 21 and Exhibit F. There is no indication of a parent company whose financials would be material to understanding the franchisor's financial condition, nor does the franchisor appear to be a thinly capitalized subsidiary relying on an undisclosed parent.

Potential Mitigations

• Your attorney should confirm the corporate structure and the relationships between the franchisor and its affiliates.
• Having your accountant review the provided financials is crucial to ensure they present a complete picture of the entity you are contracting with.
• Understanding the role and financial stability of key affiliates, like the primary supplier, is a worthwhile exercise with your business advisor.

Explanation

This risk does not appear to be present. Item 1 states that the franchisor has no predecessors. The business and franchise system were developed internally by the current company and its affiliates. Therefore, there is no hidden history of past challenges, litigation, or high failure rates under a previous owner that might be obscured from your view.

Potential Mitigations

• Your attorney can perform a corporate records check to verify the franchisor's history and lack of predecessors.
• Asking early franchisees about the history of the brand and system can help confirm the information disclosed in Item 1.
• It is still wise for a business advisor to research the history of the key individuals involved in the company.

Explanation

This risk was not identified. Item 3 discloses one litigation matter where the franchisor's predecessor was the plaintiff in a trademark dispute and ultimately prevailed. While there was a cross-complaint, it was dismissed by the court. The FDD does not show a pattern of lawsuits brought by franchisees against the franchisor alleging fraud or misrepresentation, nor does it show an unusually high number of lawsuits initiated by the franchisor against its franchisees.

Potential Mitigations

• Your attorney should still review the details of the single disclosed case to understand its nature fully.
• Performing an independent public records search for litigation involving the franchisor and its principals is a prudent step your attorney can take.
• Asking current and former franchisees about any disputes, litigated or not, can provide a more complete picture of the franchisor's relationship with its network.