Explanation

Based on Item 20 data, the franchisee turnover rate appears moderate. In 2024, 4 franchised outlets ceased operations out of a starting base of 60, a churn rate of about 6.7%. In 2023, the rate was about 5.3%. While not alarmingly high, any franchisee closures warrant investigation. High turnover can signal systemic problems, such as unprofitability or poor franchisor support, which could affect your potential for success.

Potential Mitigations

• It is crucial to contact several former franchisees listed in Exhibit I to understand their specific reasons for leaving the system.
• A discussion with your business advisor can help you analyze the turnover rates in the context of the industry and the age of the franchise system.
• Your attorney can help you formulate questions for the franchisor regarding the circumstances of these closures.

Explanation

This risk was not identified in the FDD Package. Rapid system growth can strain a franchisor's ability to provide adequate support to all franchisees. While Pokeworks has been growing, the rate of growth disclosed in Item 20 does not appear to be outpacing its infrastructure, though you should verify the quality of support with existing franchisees. A franchisor expanding too quickly may not be able to maintain quality control and franchisee assistance.

Potential Mitigations

• Speaking with a broad range of existing franchisees can provide insight into whether they feel the franchisor's support systems are keeping pace with growth.
• Your business advisor can help you assess if the franchisor has a sustainable growth plan and the personnel to support it.
• An accountant's review of financial statements can help determine if the franchisor is reinvesting in support infrastructure.

Explanation

This specific risk was not identified. Pokeworks began franchising in 2016 and has over 60 franchised units, suggesting it is past the initial startup phase. However, a newer system inherently carries more risk than a long-established one, as its brand recognition and operating procedures may still be evolving. Success often depends on the franchisor's ability to navigate growth and support its franchisees effectively, which is less proven in a younger system.

Potential Mitigations

• Engaging a business advisor to assess the brand's market position and long-term viability is a prudent step.
• Thoroughly interviewing a mix of new and established franchisees can provide a clearer picture of the system's maturity and support quality.
• Your accountant should scrutinize the franchisor's financial statements for signs of stability and sustainable growth.

Explanation

This risk was not identified. Item 2 indicates that the key personnel at BFG LLC have several years of experience within the company and, for some, with other relevant brands like Panera Bread and Paris Baguette. Lack of management experience in franchising or the specific industry can be a significant risk, as it may lead to inadequate support and poor strategic decisions. You should still verify the quality of this experience through franchisee interviews.

Potential Mitigations

• It is wise to speak with current franchisees about their direct experiences with the management team's competence and support.
• Your business advisor can help you conduct further research on the professional backgrounds of the key executives listed in Item 2.
• Posing specific questions to the franchisor about their team's experience in handling franchisee issues is recommended.

Explanation

This risk was not identified in the FDD Package. The document does not indicate that the franchisor is owned by a private equity firm. When a franchisor is owned by a PE firm, there can be a risk that short-term financial goals are prioritized over the long-term health of the franchise system. This can sometimes manifest as reduced franchisee support, increased fees, or a quick sale of the company.

Potential Mitigations

• Your attorney can help you verify the ownership structure of the franchisor through public records.
• Engaging a business advisor to research the backgrounds of the principal owners of the franchisor can provide valuable context.
• Always ask current franchisees if they are aware of any pending sales or changes in the franchisor's ownership.

Explanation

This risk was not identified in the FDD Package. Item 1 states clearly, "We do not have any predecessors." A predecessor is a company from which the franchisor acquired a major portion of its assets. When predecessors exist, it is important to investigate their history for any signs of trouble, such as litigation or high franchisee failure rates, as these issues could be inherited by the current franchisor.

Potential Mitigations

• Confirming the lack of a predecessor with your attorney is a good practice during the review process.
• Your business advisor can help you research the company's origins to ensure no predecessor history has been omitted.
• Asking existing franchisees about the history of the brand and its ownership can provide additional assurance.