Explanation

This risk was not identified in the FDD package as S&T Pizza is a new franchisor with no existing or former franchisees reported in Item 20. In general, high franchisee turnover can be a significant red flag, potentially indicating systemic problems such as a lack of profitability, poor franchisor support, or an unsustainable business model. Careful analysis of Item 20 data is crucial when evaluating an established franchise system.

Potential Mitigations

• Once franchisees exist, consulting with your accountant to analyze turnover percentages in Item 20 is a key due diligence step.
• It is wise to have your attorney help formulate questions for former franchisees to understand their reasons for leaving a system.
• A business advisor can help compare a system's turnover rates against industry benchmarks for a clearer perspective.

Explanation

This risk was not identified, as Item 20 shows that S&T Pizza has not yet sold any franchises and operates only one affiliate-owned unit. Generally, while growth is positive, very rapid expansion can strain a franchisor's resources, potentially leading to inadequate franchisee support, training, and quality control. This is a key area of analysis for a growing franchise system.

Potential Mitigations

• For a growing system, having your business advisor assess the franchisor's support infrastructure relative to its expansion rate is important.
• An accountant should review the financials of an expanding franchisor to determine if they have the capital to support growth.
• Speaking with franchisees in a rapidly growing system can provide insight into the quality of ongoing support.

Explanation

This risk was not identified in the FDD package. Item 1 does not indicate that the franchisor is owned or controlled by a private equity firm. When this ownership structure exists, it can introduce risks related to a focus on short-term returns over the long-term health of the franchise system. Franchisees in such systems may face pressures like increased fees or reduced support.

Potential Mitigations

• If a franchisor is PE-owned, having a business advisor research the firm's history with other franchise brands is a crucial step.
• It is important to ask franchisees in a PE-owned system about changes in culture or support since the acquisition.
• Your attorney should review the assignment clause to understand the implications if the PE firm sells the franchise system.

Explanation

This risk was not identified in the FDD. S&T Pizza appears to be the primary entity, and its affiliates are disclosed. In some cases, a franchisor might be a thinly capitalized subsidiary of a larger parent company. If the parent's financial information is not provided when it should be (for example, if it guarantees the franchisor's obligations), it can obscure a complete picture of the system's financial backing.

Potential Mitigations

• Your attorney can help verify the franchisor's corporate structure and determine if a parent entity's financials should have been disclosed.
• If a parent company guarantee is offered, an accountant should review both the guarantee's terms and the parent's financials.
• Understanding the relationships between the franchisor and its affiliates is a key part of due diligence a business advisor can assist with.

Explanation

This risk was not identified in the FDD package, as Item 1 does not list any predecessors for S&T Pizza. When a franchise system has been acquired from a predecessor, it is important to investigate the predecessor's history, including any litigation, bankruptcy, or high franchisee turnover, as these issues could be inherited by the new franchisor.

Potential Mitigations

• If a predecessor is listed, your attorney should carefully review their history as disclosed in Items 1, 3, and 4.
• Speaking with long-term franchisees who operated under the predecessor can provide valuable historical context.
• A business advisor can help you research the predecessor's public reputation and track record.

Explanation

This risk was not identified, as Item 3 of the FDD states that no litigation is required to be disclosed. Generally, a pattern of litigation, especially lawsuits from franchisees alleging fraud or misrepresentation, is a major red flag. Similarly, an excessive number of lawsuits initiated by the franchisor against franchisees can indicate an overly aggressive or litigious culture, which could pose a risk to your business relationship.

Potential Mitigations

• It is crucial for your attorney to carefully review any and all litigation disclosed in Item 3 for patterns and severity.
• Independent research on disclosed cases, with help from your legal counsel, can provide context beyond the FDD summary.
• Talking to franchisees involved in litigation, if possible, can offer direct insight into the nature of disputes.