Explanation

This risk was not identified. The franchisor, PrimoHoagies Franchising, Inc. (PrimoHoagies), began franchising in 2006 and has over 100 units, indicating it is an established system. An unproven or new franchise system can carry higher risks due to a lack of brand recognition, undeveloped support systems, and a business model that has not been tested over time, which may lead to higher failure rates for initial franchisees.

Potential Mitigations

• Even with an established system, it is wise to have your business advisor research the brand's current market position and competitive landscape.
• Engage your accountant to review the franchisor's financial statements for the past three years to assess stability and growth trends.
• Contacting franchisees who joined at different times can provide a historical perspective on the system's evolution and support consistency.

Explanation

This risk was not identified. The PrimoHoagies concept, focused on specialty sandwiches, operates within the well-established fast-casual restaurant industry. A business concept tied to a short-term trend or fad presents a significant risk, as customer interest may decline rapidly, leaving you with a long-term contractual obligation for a business with dwindling demand. Evaluating a concept's long-term consumer appeal is a crucial part of due diligence.

Potential Mitigations

• Engaging a business advisor to research the long-term market trends for specialty sandwich shops can provide valuable context.
• It is useful to ask the franchisor about their strategy for product innovation and system evolution to stay relevant in a competitive food market.
• Your financial advisor can help you assess the business model's resilience to economic shifts and changing consumer tastes.

Explanation

This risk was not identified. The key executives listed in Item 2, Nicholas Papanier Jr. and Eric Bonner, have extensive, long-term experience with the PrimoHoagies system, dating back to 2010 and 2000, respectively. Inexperienced management can pose a significant risk, as it may lead to poor strategic decisions, inadequate franchisee support, and an underdeveloped operational system. Assessing the relevant industry and franchising experience of the leadership team is a key due diligence step.

Potential Mitigations

• A business advisor can help you research the professional backgrounds and reputations of the key executives.
• During discussions with current franchisees, it's beneficial to ask about their direct experiences and the quality of support they receive from the management team.
• Your attorney can help you understand the roles and responsibilities of the management team as outlined in the franchise documents.

Explanation

This risk was not identified. Item 1 and the financial statements in Item 21 do not indicate that the franchisor is owned by a private equity firm. When a franchise is owned by a PE firm, there can be a risk that decisions are focused on short-term investor returns rather than the long-term health of the system. This might manifest as reduced support, increased fees, or a quick resale of the brand, creating uncertainty for franchisees.

Potential Mitigations

• If a franchisor is PE-owned, a business advisor can help you research the firm’s reputation and track record with other franchise brands.
• It is important to have your attorney review any clauses in the Franchise Agreement that discuss the franchisor's right to sell or assign the system.
• Speaking with franchisees who have been with the system before and after a PE acquisition can provide valuable insights.

Explanation

This risk was not identified. The franchisor discloses its parent/affiliate structure, including Nellie's Provisions, Inc. and PrimoHoagies Holding Company, Inc., and provides consolidated financial statements. Failing to disclose a parent company or provide its financials when required can obscure the true financial backing and stability of the franchise system, hiding significant risks from a prospective franchisee. Proper disclosure allows for a complete assessment of the entire corporate structure you are investing in.

Potential Mitigations

• Your accountant should always review the corporate structure in Item 1 and verify that the provided financials in Item 21 are for the correct entity.
• If a parent company exists and guarantees the franchisor's performance, an attorney should ensure that the guarantee is a formal, attached exhibit.
• A business advisor can help you research the parent company's history and overall stability.

Explanation

This risk was not identified. Item 1 discloses a predecessor entity from 2002 that was converted into the current franchisor entity in 2005. No other predecessors are noted. In situations where a franchisor acquires a system from a predecessor, it is important to investigate the predecessor's history, as any past issues like litigation, high franchisee turnover, or bankruptcy could indicate underlying problems that may have been inherited by the current franchisor.

Potential Mitigations

• When a predecessor is disclosed, your attorney should carefully review their history as described in Items 3 and 4.
• It is good practice to ask long-term franchisees about their experiences under any previous ownership.
• A business advisor can assist in researching the public record and reputation of any predecessor entities.