Explanation

This risk was not identified in the FDD package. As a new franchise system, Sammy's has no history of franchised outlets, and therefore no franchisee turnover is reported in Item 20. High turnover is a critical indicator of potential systemic problems, such as a lack of profitability or poor franchisor support. A prospective franchisee should always analyze this data carefully in established systems.

Potential Mitigations

• For any established franchise, it is critical to have an accountant analyze the turnover data in Item 20 over the past three years.
• Engaging a business advisor to contact former franchisees is a key due diligence step to understand why they left the system.
• Your attorney should help you frame questions for former franchisees to identify any systemic issues.

Explanation

This risk was not identified. Item 20 shows that Sammy's is a new system with no existing franchisees and only two company-owned outlets. Therefore, there is no evidence of rapid system growth. In other franchises, rapid growth can strain a franchisor's ability to provide adequate support, so this is an important area to evaluate.

Potential Mitigations

• In a rapidly growing system, it is prudent to have your business advisor assess whether the franchisor's support infrastructure is scaling with its unit growth.
• Speaking with a range of new and established franchisees can provide insight into the consistency and quality of support.
• An accountant's review of the franchisor's financials can help determine if they are investing sufficiently in support staff and systems.

Explanation

This risk was not identified. The Sammy's concept, focusing on sliders, chicken, and fries, is based on established fast-casual food categories and does not appear to be a fad. A fad business is one based on a short-lived trend, which can pose a significant risk to a long-term franchise investment. Your business model could collapse as consumer interests shift, while your contractual obligations remain.

Potential Mitigations

• Your business advisor can help you research the long-term market demand for the core product or service to gauge its sustainability.
• It is important to evaluate the franchisor's commitment to ongoing research and development to adapt to changing consumer tastes.
• Seeking an accountant's opinion on the business model's resilience to economic shifts is a valuable step.

Explanation

This risk was not identified. Item 2 indicates that the key executives at Sammy's have extensive prior experience managing and growing other established franchise systems, notably East Coast Wings + Grill. Inexperienced management is a significant risk in franchising, as it can lead to poor strategic decisions and inadequate franchisee support. The experience level of this team appears to be a potential strength for the system.

Potential Mitigations

• A business advisor can help you verify the track record and reputation of the management team within the franchise industry.
• You should confirm the quality of their past support by speaking with franchisees from their previous systems.
• Your attorney can help you understand how management's experience might influence their approach to the franchise relationship.

Explanation

This risk was not identified in the FDD package. Item 1 indicates the franchisor is owned by entities associated with its management team, not by a third-party private equity firm. Private equity ownership can introduce risks related to a focus on short-term returns over the long-term health of the brand, which could potentially lead to increased fees or reduced support for franchisees.

Potential Mitigations

• If dealing with a PE-owned franchisor, engaging a business advisor to research the firm's history with other franchise brands is wise.
• You should discuss with your attorney the implications of assignment clauses that allow the franchisor to sell the system without franchisee consent.
• Speaking with franchisees who have operated under the PE firm's ownership can provide valuable firsthand accounts of any changes.

Explanation

This risk was not identified. Item 1 discloses the parent company structure and the roles of the affiliated entities. While parent company financials are not provided, their inclusion is not always required for a startup franchisor unless specific conditions, like providing a guarantee, are met. The disclosures appear to meet the required standard. In other cases, failing to disclose a parent company can obscure the true financial backing or control of a franchise system.

Potential Mitigations

• Your attorney should always verify that the ownership structure disclosed in Item 1 is complete and transparent.
• If a parent company guarantees the franchisor's obligations, it is important for your accountant to review the parent's financial statements.
• A business advisor can help you understand the practical implications of the relationships between the franchisor and its parent or affiliates.

Explanation

This risk was not identified. Item 1 of the FDD explicitly states that the franchisor has no predecessors. A predecessor is a company from which the franchisor acquired a major part of its assets. A failure to disclose a predecessor with a troubled history of litigation, bankruptcy, or franchisee failure would be a significant red flag, as it could hide systemic issues you might inherit.

Potential Mitigations

• Your attorney should carefully review Item 1 for any mention of predecessors or recent acquisitions by the franchisor.
• It is useful to ask a business advisor to perform independent research on the history of the brand and its key executives.
• If a predecessor is disclosed, speaking with long-term franchisees about their experience under the prior ownership is critical.

Explanation

This risk was not identified. Item 3 of the FDD states there is no litigation that requires disclosure. A pattern of litigation, particularly franchisee-initiated lawsuits alleging fraud or breach of contract, is a serious warning sign of systemic problems. Conversely, a high volume of franchisor-initiated lawsuits against franchisees might indicate an overly aggressive or litigious culture.

Potential Mitigations

• It is crucial for your attorney to carefully review any disclosed litigation in Item 3 to understand the nature and potential implications of the disputes.
• Engaging a business advisor to speak with current and former franchisees can provide context for any disclosed legal disputes.
• Your attorney can conduct public record searches to see if there is any litigation that was not required to be disclosed but may still be relevant.