Explanation

This risk was not identified in the FDD package. Item 20 data shows a growing franchise system with a relatively low number of terminations compared to the number of new openings over the past three years. High franchisee turnover can be a red flag for systemic problems, such as lack of profitability or poor franchisor support, so its absence here is a positive indicator. Continuous monitoring of these trends in future FDDs is still important.

Potential Mitigations

• A business advisor can help you calculate the annual turnover rate from Item 20 data and compare it to industry averages.
• Contacting a diverse group of current and former franchisees listed in Item 20 is a crucial step to verify satisfaction levels.
• Your attorney can help you formulate questions for former franchisees to understand their reasons for leaving the system.

Explanation

This risk was not identified. Potbelly Franchising, LLC (Potbelly) and its affiliates have a long operating history dating back to 1997 and have been franchising since 2009, as stated in Item 1. This extensive experience reduces risks associated with unproven business models or underdeveloped support systems that can be common with newer, less-established franchisors.

Potential Mitigations

• When evaluating any franchise, it is prudent to have your business advisor assess the franchisor's years in operation and in franchising.
• Speaking with franchisees who have been in the system for many years provides insight into its long-term viability.
• Your attorney can review the FDD for any recent changes in ownership or strategy that might affect the stability of the established system.

Explanation

This risk was not identified. The core business is selling sandwiches, soups, and salads, a well-established segment of the restaurant industry with sustained consumer demand. While branding and store atmosphere evolve, the fundamental product offering is not based on a fleeting trend or fad, which provides a more stable business foundation compared to concepts built on novelties.

Potential Mitigations

• For any business concept, a thorough analysis of its long-term market demand with a business advisor is a critical step.
• Evaluating the franchisor’s commitment to research and development can provide clues about its adaptability to market changes.
• Consider how a business model might perform during various economic cycles with your financial advisor.

Explanation

This risk was not identified. The executive team described in Item 2 has extensive and relevant experience in the restaurant and franchise industries, with many holding senior positions at major national brands like Wendy's, Panera Bread, and Dunkin' Brands. This level of experience suggests the management team is well-equipped to manage a franchise system, reducing risks associated with poor strategic direction or inadequate support.

Potential Mitigations

• It is always a good practice to research the backgrounds of the key executives listed in Item 2 with your business advisor.
• Speaking with existing franchisees can provide valuable insight into the competence and effectiveness of the management team.
• Your attorney can help assess whether the management team's experience is relevant to the specific franchise concept.

Explanation

This risk was not identified. Item 1 indicates the ultimate parent company is Potbelly Corporation, a publicly traded entity, not a private equity firm. While public companies have their own pressures, the specific risks associated with a typical private equity model, such as a focus on short-term returns and a rapid exit strategy, are not present here.

Potential Mitigations

• A business advisor can help you research the ownership structure of any franchisor, including its parent companies.
• If a franchisor is owned by a private equity firm, it is important to investigate the firm's history with other franchise brands.
• Reviewing the franchisor's right to sell the system in the Franchise Agreement is a key task for your attorney.

Explanation

This risk was not identified. The franchisor clearly discloses its parent company, Potbelly Corporation, in Item 1. Furthermore, it provides the parent company's audited financial statements in Exhibit G-1 and a full Guarantee of Performance from the parent in Exhibit G-2. This level of transparency meets disclosure requirements and allows for a proper assessment of the consolidated entity's financial health.

Potential Mitigations

• Your attorney should verify that if a franchisor is a subsidiary, the parent company is properly disclosed in Item 1.
• If a parent company guarantees the franchisor's performance, an accountant must review the parent's financial statements.
• Ensure any required parent guarantee is included as an exhibit and reviewed by your legal counsel for enforceability.

Explanation

This risk was not identified. Item 1 of the FDD explicitly states, "We have no predecessors." This simplifies the due diligence process, as there is no need to investigate the history, litigation, or bankruptcy records of a prior entity that operated the system, which can sometimes conceal past problems.

Potential Mitigations

• A thorough review of Item 1 by your attorney is essential to identify any disclosed predecessor companies.
• If a predecessor is identified, it's crucial that your attorney and accountant investigate its history of litigation and bankruptcy.
• Inquiring with long-standing franchisees about their experiences under any previous ownership can provide valuable context.