Explanation

This risk was not identified in the FDD Package. Rapid growth can strain a franchisor's ability to provide adequate support. While SHH Group is adding some new franchises, the overall system size has seen a net decrease over the last three years, suggesting that uncontrolled rapid growth is not a current primary risk. However, you should monitor any future plans for accelerated expansion.

Potential Mitigations

• Your business advisor can help you monitor the franchisor's future growth plans and assess their capacity to scale support services accordingly.
• Engage your accountant to periodically review the franchisor's financial statements for signs of investment in support infrastructure.
• Regularly communicate with other franchisees through an independent association to gauge the quality of franchisor support over time.

Explanation

This risk was not identified in the FDD Package. SHH Group has a lengthy operational history through its predecessors, with some franchising activity dating back decades. The business model of inventory control for the hospitality industry is established. Therefore, the risks associated with an entirely new or unproven system do not appear to be present here. The system has a significant number of existing franchisees.

Potential Mitigations

• Engaging a business advisor can help you evaluate the long-term market position and competitive landscape of this established business model.
• Your attorney should still review the complete history of the franchisor and its predecessors as detailed in Item 1.
• It is wise to speak with long-term franchisees to understand how the system has evolved and the support provided over the years.

Explanation

This risk was not identified in the FDD Package. The business of providing inventory control services to bars and restaurants addresses a persistent operational need for managing loss and improving profitability. While the hospitality industry itself is subject to economic cycles, the underlying service is not based on a short-term trend or fad. The franchisor's long history through predecessors further suggests a sustainable business concept rather than a fleeting one.

Potential Mitigations

• A business advisor can help you analyze the long-term demand for inventory management services in your specific local market.
• In discussions with your accountant, assess the resilience of the hospitality industry to economic shifts and how that might impact your client base.
• Consult with current franchisees to understand the stability and recurring nature of their client relationships.

Explanation

This risk was not identified in the FDD Package. Item 2 and Exhibit D show that the key executives and Regional Directors of SHH Group have extensive, long-term experience within the Sculpture Hospitality system and the franchising industry, with many individuals having been involved for over a decade. This depth of experience suggests a strong understanding of the business model and franchisee support needs, mitigating the risks associated with inexperienced management.

Potential Mitigations

• Even with experienced management, it's wise to interview current franchisees about the quality and effectiveness of the support they receive.
• A business advisor can help you research the reputation and track record of the key executives within the franchise industry.
• Your attorney should verify that the experience described for management is directly relevant to operating and supporting a franchise system.

Explanation

This risk was not identified in the FDD Package. The franchisor, SHH Group, is disclosed as a wholly owned subsidiary of FH Equity Holdings, LLC. However, the document does not indicate that this parent is a private equity firm with a typical short-term investment horizon. Therefore, the specific risks commonly associated with private equity ownership, such as a primary focus on rapid exit strategies over long-term brand health, do not appear to be present based on the information provided.

Potential Mitigations

• A business advisor can assist you in researching the parent entity, FH Equity Holdings, LLC, to better understand its structure and investment strategy.
• Your attorney should review the assignment clause in the Franchise Agreement to understand your rights if the franchise system is sold.
• Discuss with current franchisees if they have observed any changes in focus or support related to the parent company's ownership.

Explanation

This risk was not identified in the FDD Package. SHH Group clearly discloses its parent company, FH Equity Holdings, LLC, in Item 1. Item 21 includes the audited consolidated financial statements for SHH Group and its subsidiaries. There is no indication that the parent company's financials are required but have been omitted. The provided financials appear to give a clear picture of the franchising entity's financial health, mitigating this specific disclosure risk.

Potential Mitigations

• Your accountant should confirm if the provided financial statements are sufficient for a complete risk assessment or if parent company financials might be needed.
• Consulting with your attorney is recommended to understand the legal relationship and any obligations flowing between the franchisor and its parent.
• A business advisor can help you assess the operational impact of the parent company on the franchise system.

Explanation

This risk was not identified in the FDD Package. Item 1 provides a detailed history of the franchisor's predecessors, including Bevinco and Sculpture Hospitality, LLC. Item 3 discloses litigation involving a predecessor, and a regulatory action involving another predecessor. This appears to be a transparent disclosure of the system's lineage and historical issues, rather than an attempt to obscure them, allowing you to assess the inherited challenges of the system.

Potential Mitigations

• A thorough review of the disclosed predecessor history with your attorney is crucial to understand the system's evolution and any inherited risks.
• You should discuss the disclosed litigation and regulatory actions with your attorney to understand their implications fully.
• Speaking with long-tenured franchisees about their experiences under predecessors could provide valuable context.