Explanation

This risk was not identified in the FDD Package. Sbarro LLC traces its roots to 1956 and has been franchising for many years, indicating it is an established system. An unproven or new system would present higher risks due to the lack of a long-term performance record, potentially untested operational plans, and minimal brand recognition, making it difficult to assess the likelihood of success for a new franchisee.

Potential Mitigations

• For any franchise, especially a newer one, consulting with a business advisor to evaluate the long-term viability of the business concept is recommended.
• An attorney can help investigate the franchisor's history and the experience of its management team.
• Speaking with the system's earliest franchisees provides valuable insight into the franchisor's evolution and support consistency.

Explanation

This risk was not identified in the FDD Package. The Sbarro brand, focused on Italian-style food like pizza and pasta, has operated for decades and is not based on a recent or fleeting trend. A fad business carries the risk that consumer interest may decline quickly, potentially leaving you with a worthless investment while still being bound by a long-term franchise agreement and lease.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term consumer demand for any franchise's core products or services.
• It is wise to evaluate a company's history of innovation and adaptation to changing consumer tastes.
• Your financial advisor can help assess a business model's resilience to economic shifts and downturns.

Explanation

This risk was not identified in the FDD Package. The executive team described in Item 2 possesses extensive and long-term experience with Sbarro LLC 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 failure to adapt to market changes, which could jeopardize your investment.

Potential Mitigations

• It is always prudent to research the backgrounds of the key executives of any franchise system you are considering.
• A business advisor can help you assess whether the management team's skills align with the company's strategic goals.
• Franchisees listed in Item 20 can provide valuable, firsthand feedback on the effectiveness and accessibility of the management team.

Explanation

This risk was not identified in the FDD Package. Item 1 does not indicate that Sbarro LLC is owned by a private equity firm. This type of ownership can sometimes lead to strategies focused on short-term returns, such as cutting franchisee support or increasing fees, rather than focusing on the long-term health of the brand and its franchisees. This could potentially affect your profitability and the quality of support you receive.

Potential Mitigations

• For any franchise, your business advisor can help you research the ownership structure and the track record of any parent company.
• It's wise to ask current franchisees if they have noticed any changes in franchisor behavior or support levels following an ownership change.
• Your attorney can review the franchise agreement for any clauses that may be concerning under a private equity ownership model.

Explanation

This risk was not identified in the FDD Package. The franchisor, Sbarro LLC, is a subsidiary of Sbarro Holdings, Inc., which is properly disclosed in Item 1. The FDD includes the parent company's audited consolidated financial statements in Exhibit L, as required. A failure to disclose a parent company or provide its required financial statements can obscure the true financial health and backing of the franchise system, hiding significant risks from a potential franchisee.

Potential Mitigations

• Your accountant should always confirm that the financial statements provided are for the correct legal entity and any required parent companies.
• An attorney can verify the corporate structure and ensure all necessary disclosures and guarantees from a parent company are present and correctly documented.
• Always question any discrepancies or lack of clarity regarding the franchisor's ownership structure.

Explanation

This risk was not identified in the FDD Package. Item 1 discloses a history of predecessors, and Items 3 and 4 state there is no material litigation or bankruptcy to disclose regarding them. When a franchisor acquires a system from a predecessor, it can inherit problems. A failure to fully disclose a predecessor's history could hide past issues like high franchisee failure rates or legal disputes, giving you an incomplete picture of the system's historical challenges.

Potential Mitigations

• A franchise attorney should carefully review all disclosures related to predecessors in Items 1, 3, and 4.
• When a predecessor is involved, it is valuable to speak with long-term franchisees who operated under the previous ownership.
• Your business advisor can assist in researching the public record of any predecessor company for additional context.

Explanation

This risk was not identified in the FDD Package. Item 3 states that there is no litigation required to be disclosed. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may suggest systemic problems with the franchisor's business practices, disclosure integrity, or overall relationship with its franchisees.

Potential Mitigations

• For any FDD, it is crucial that your attorney carefully reviews all litigation details in Item 3.
• Your attorney can also conduct independent searches for litigation involving the franchisor that may not be disclosed in the FDD.
• A high volume of litigation should prompt detailed discussions with current and former franchisees about their experiences.