Explanation

The audited financial statements in Exhibit I do not indicate financial instability. For 2024, Salsarita's Franchising, LLC (SF) reported a positive net income and substantial member's equity, with sufficient current assets to cover current liabilities. However, understanding a franchise's financial health is critical, as a struggling franchisor may be unable to provide adequate support or invest in the brand, potentially jeopardizing your investment.

Potential Mitigations

• A franchise accountant should review the complete financial statements, including all footnotes about related-party transactions, to form an independent opinion of financial health.
• Your accountant can help you analyze revenue trends, comparing royalties to initial franchise fees to gauge the system's ongoing viability.
• Engage a business advisor to discuss how the franchisor's financial position might affect its ability to support franchisees long-term.

Explanation

The data in Item 20 does not indicate rapid system growth; in fact, the total number of outlets has decreased over the last three years. While this avoids risks associated with over-expansion, a shrinking system can present its own challenges, such as declining brand recognition or reduced contributions to advertising funds.

Potential Mitigations

• You should discuss the implications of a shrinking system, such as its effect on brand value and advertising funds, with a business advisor.
• Investigate the reasons for the system's contraction by speaking with current and former franchisees.
• Your accountant can help model the financial impact of reduced ad fund contributions from a smaller franchisee base.

Explanation

The franchisor, Salsarita's Franchising, LLC (SF), has been offering franchises since 2011, as noted in Item 1. Therefore, this is not a new or unproven system. Generally, investing in a new system carries higher risks due to the lack of a track record, underdeveloped support systems, and minimal brand recognition.

Potential Mitigations

• When evaluating any franchise, it is wise to review the franchisor's history and length of time in business with your attorney.
• Assessing the maturity and stability of a franchise system is a key task for your business advisor.
• Even with established systems, having your accountant review multi-year financial and operational data is crucial for due diligence.

Explanation

The business model, a fast-casual Mexican grill, is a well-established and long-standing concept within the restaurant industry, not a temporary fad. Investing in a fad-based business can be risky because consumer interest may decline, potentially leaving you with a non-viable business even though your contractual obligations continue.

Potential Mitigations

• A business advisor can help you research the long-term market trends and competitive landscape for any industry you consider entering.
• When evaluating a business concept, it's important to assess its sustainability and resilience through various economic cycles with your financial advisor.
• Legal counsel should review the franchise term to ensure you understand the length of your commitment.

Explanation

Item 2 shows that the key executives have extensive and long-term experience with the Salsarita's brand and in the restaurant industry. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, inadequate franchisee support, and a lack of understanding of the franchise relationship.

Potential Mitigations

• It is always prudent to review the backgrounds of the franchisor's key management team in Item 2 with a business advisor.
• Discussing the quality and responsiveness of the management team with current franchisees can provide valuable insight.
• Your attorney can help assess if the management experience aligns with the support obligations outlined in the franchise agreement.

Explanation

Item 1 does not indicate that the franchisor is owned by a private equity firm. This type of ownership can sometimes introduce risks related to prioritizing short-term investor returns over the long-term health of the franchise system. It is important to understand the ownership structure and its potential influence on franchisor strategy.

Potential Mitigations

• Your attorney should always review the ownership structure disclosed in Item 1 to identify any potential conflicts of interest.
• Discussing the franchisor's long-term vision and commitment to the brand with a business advisor is a key part of due diligence.
• In any case, it is important to understand the franchisor's right to sell or assign the franchise system.

Explanation

This FDD does not disclose any legal predecessors from which Salsarita's Franchising, LLC (SF) acquired the business. Understanding a franchisor's history, including any previous owners or corporate forms, is important because it can reveal inherited issues, past litigation, or trends in franchisee success or failure.

Potential Mitigations

• As part of due diligence, your attorney should always confirm whether a franchisor has a predecessor and analyze any related disclosures.
• A business advisor can help investigate the brand's history, even if no formal predecessor is listed.
• Inquire with long-term franchisees about the history of the brand and any significant past changes in ownership or management.

Explanation

Item 3 of the FDD indicates that there is no litigation that requires disclosure under federal franchise law. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, can be a significant red flag about a franchise system's health and the franchisor's practices.

Potential Mitigations

• Even with a clean Item 3, it is wise to ask current and former franchisees about their experiences and any informal disputes they may have had.
• Your attorney can conduct independent searches for litigation that may not have met the technical disclosure thresholds.
• Always review the dispute resolution clauses in the franchise agreement with your attorney to understand the process should a conflict arise.