Explanation

This risk was not identified in the FDD package. The audited financial statements in Item 21 for Rococo Franchise Corporation (RFC) show consistent growth in revenue and net income from 2022 to 2024, with a healthy balance sheet and positive shareholder equity. A financially stable franchisor is generally better positioned to provide ongoing support and invest in brand growth, which is crucial for your long-term success.

Potential Mitigations

• It is always a good practice for your accountant to conduct an independent review of the franchisor's full financial statements, including all footnotes.
• Engage a business advisor to assess whether the franchisor's financial resources are adequate to support its projected system growth and fulfill support obligations.
• Your attorney should confirm that the financial statements have been audited by a certified public accountant as required for a non-startup franchisor.

Explanation

The FDD does not indicate high franchisee turnover. Item 20 tables show a low number of terminations and cessations relative to the system size over the last three years, with a net growth in franchised outlets. The separate decline of 'predecessor-franchised' outlets appears to be a planned phase-out of an older system. Low turnover can suggest franchisee satisfaction and a sustainable business model.

Potential Mitigations

• Despite low reported turnover, contacting a diverse sample of current franchisees from the list in Item 20 is a crucial due diligence step.
• Inquire with the franchisor about the circumstances surrounding the single termination in 2022 and cessation of operations in 2023 for a complete picture.
• Having your accountant carefully review the Item 20 tables for any subtle negative trends is a prudent measure.

Explanation

This risk was not identified. Item 20 data shows steady, not excessively rapid, growth in the number of current-system franchised outlets over the past three years. The franchisor's support and training infrastructure, detailed in Item 11, appears established. Controlled growth allows a franchisor to maintain the quality of its support systems, which is essential for new franchisees entering the system.

Potential Mitigations

• You should still ask the franchisor about their capacity and plans for scaling their support infrastructure to match future growth.
• It is beneficial to interview a range of existing franchisees about the current quality and responsiveness of the franchisor's support.
• Your accountant can review the franchisor's financials in Item 21 to assess if they have the resources to support their stated growth plans.

Explanation

This risk was not identified. Item 1 indicates that RFC has been offering franchises since 1995 and its predecessor since 1982. The management team detailed in Item 2 has decades of experience with the brand and in the restaurant industry. An established system with experienced leadership can reduce risks associated with unproven business models and inadequate support infrastructure.

Potential Mitigations

• A thorough review of the management team's specific franchising experience, not just industry experience, should be conducted with your business advisor.
• It is still valuable to speak with the longest-term franchisees listed in Item 20 to understand the system's evolution and historical challenges.
• Your attorney can help you verify the business history disclosed in Item 1 and Item 2.

Explanation

The business model, specializing in pan-style pizza and pasta, does not appear to be a fad. This is a well-established segment of the restaurant industry with a long history of consumer demand. The franchisor has been in business for decades, as detailed in Item 1, suggesting a sustainable concept rather than one based on a short-term trend. This longevity reduces the risk of the business model becoming obsolete.

Potential Mitigations

• A business advisor can help you conduct an independent analysis of the local market to assess the long-term demand for this specific style of restaurant.
• It is prudent to evaluate the franchisor's plans for menu innovation and adaptation to evolving consumer tastes, as hinted at in Item 11.
• Consider the business model's resilience to economic downturns and increased competition in your area with your financial advisor.

Explanation

This risk was not identified. Item 2 shows that the key executives of RFC have extensive and long-term experience with both the Rocky Rococo brand and the franchise system, with some executives having been with the company since the 1980s and 1990s. Experienced management is often better equipped to provide effective support, make sound strategic decisions, and maintain a stable franchise system.

Potential Mitigations

• Even with experienced leaders, it is wise to speak with a range of franchisees about their direct experiences with the management team's accessibility and effectiveness.
• A business advisor can help you research the recent performance of the system under the current leadership team.
• You should inquire about the franchisor's succession planning to ensure continuity of experienced leadership.

Explanation

This risk is not present in the FDD. Item 1 indicates the franchisor is a corporation and does not disclose any ownership by a private equity firm. The management team appears to be composed of long-tenured individuals, not appointed representatives of an investment fund. This suggests that strategic decisions may be focused on the long-term health of the brand rather than short-term investor returns.

Potential Mitigations

• Your attorney can help you verify the ownership structure of the franchisor through public records to confirm the absence of private equity involvement.
• It is still important to understand the franchisor's long-term vision for the company, which a business advisor can help you assess.
• A discussion with franchisees about any recent major shifts in company philosophy or operational focus is always recommended.

Explanation

This risk was not identified. Item 1 clearly identifies Rococo Franchise Corporation as the franchisor and notes that it is not a subsidiary of any company. It does identify an affiliate, Rocky Rococo Corporation, which owns the intellectual property and has licensed it to RFC. The FDD appears transparent about this structure, and since RFC itself has established financials, the lack of a parent company is not a concern.

Potential Mitigations

• Your attorney should review the intellectual property license agreement mentioned in Item 1 to understand the relationship between RFC and its affiliate.
• It's a good practice to have your accountant review the financials of any significant affiliates if they were provided or available.
• A business advisor can help you understand the implications of the franchisor's corporate structure.

Explanation

This risk appears to be present but is likely low impact. Item 1 discloses a predecessor, Rocky Rococo Corporation, that offered franchises from 1982-1987. Item 20 shows a declining number of these predecessor-franchised outlets, which are being phased out. While this represents a historical aspect of the system, the current offering is from RFC, which began franchising in 1995. The phase-out seems managed and is clearly disclosed.

Potential Mitigations

• In discussions with long-term franchisees, you could ask about their experience under any predecessors to gain historical context.
• Your attorney should review the disclosures in Items 1, 3, and 4 to ensure there are no undisclosed inherited liabilities from the predecessor.
• A business advisor can help you understand if any aspect of the predecessor's history might still impact the brand's reputation today.

Explanation

This risk was not identified in the FDD. Item 3 explicitly states, 'No litigation is required to be disclosed in this Item.' The absence of disclosed litigation against the franchisor, particularly claims of fraud or misrepresentation from other franchisees, is a positive indicator. It suggests a lower likelihood of systemic issues with the franchisor’s sales practices or franchisee relations.

Potential Mitigations

• Your attorney can perform an independent public records search to verify if any material litigation exists that may not have met the threshold for disclosure.
• Speaking with current and former franchisees about their relationship with the franchisor can provide insight beyond formal litigation records.
• It's wise to ask the franchisor directly if they have been involved in any mediations or arbitrations, which may not always be disclosed in Item 3.