Explanation

This risk was not identified in the FDD Package. A fad business is one tied to a fleeting trend, which can pose a significant risk to a long-term investment like a franchise. Once consumer interest wanes, your business could face declining sales, but you would still be bound by the long-term franchise agreement and its financial obligations. Assessing the long-term, sustainable demand for a product or service is a critical part of due diligence.

Potential Mitigations

• A business advisor can help you research the industry to assess the long-term market demand for the products and services.
• It is wise to evaluate the franchisor's stated plans for innovation, research, and development to gauge their focus on staying relevant.
• Your accountant should help you model the financial impact of potential declines in consumer trends.

Explanation

This risk was not identified in the FDD Package. Private equity ownership can introduce risks, as the firm's primary goal may be maximizing returns over a fixed period, which might not always align with the long-term health of franchisees. This can sometimes lead to increased fees, reduced support, or a quick sale of the franchise system. Understanding the ownership structure is important for assessing the franchisor's long-term objectives and stability.

Potential Mitigations

• Engaging a business advisor to research a private equity owner's history with other franchise brands can provide valuable insight.
• Your attorney should review the franchise agreement for any clauses that make it easy for the franchisor to sell the system without your consent.
• It is wise to discuss any changes in support or culture with franchisees of other systems owned by the same private equity firm.

Explanation

This risk was not identified in the FDD Package. Franchisors are required to disclose parent companies in Item 1. If a franchisor is a subsidiary, the financial health of the parent can be critical, yet its financial statements might not be included unless it guarantees the franchisor's obligations. This can obscure the true financial backing of the system, creating a risk if the franchisor itself is not financially sound. A full picture requires transparency about the entire corporate structure.

Potential Mitigations

• Your attorney should help you verify the franchisor's corporate structure and identify any parent companies.
• If a parent company exists and guarantees performance, it is crucial that your accountant reviews the parent's financial statements.
• Understanding the legal and financial relationship between a franchisor and its parent is a key task for your attorney.

Explanation

This risk was not identified in the FDD Package. Item 1 requires the disclosure of any business predecessors. A failure to disclose or properly describe a predecessor can hide a history of business failures, litigation, or other problems associated with the franchise system before the current franchisor took over. Understanding the full history of the brand and system is crucial for a complete risk assessment, as past problems can sometimes resurface.

Potential Mitigations

• A thorough review of Item 1 with your attorney is important to identify any disclosed predecessors.
• Engaging a business advisor to perform independent research on the company's history may uncover information about prior owners.
• Speaking with long-term franchisees about their experience under any previous ownership can provide valuable historical context.

Explanation

This risk was not identified in the FDD Package. The franchisor discloses that no litigation information is required to be included in Item 3. This is a positive indicator, suggesting the absence of recent, material legal disputes with franchisees, suppliers, or government agencies that meet the FTC's disclosure thresholds. However, it does not guarantee the complete absence of any legal conflicts, only that none have met the specific criteria for mandatory disclosure.

Potential Mitigations

• Your attorney can conduct public record searches to verify the absence of significant litigation beyond what is disclosed.
• Asking current and former franchisees about their experiences with disputes, even those not rising to the level of litigation, is a valuable due diligence step.
• A business advisor can help you assess the overall health of franchisee-franchisor relations within the system.