Explanation

This risk was not identified. The franchisor's audited financial statements in Exhibit D show consistent profitability, positive cash flow, and a strong balance sheet with substantial member's equity. Financial stability is important because it suggests the franchisor may have the resources to support its franchisees, invest in the brand, and fulfill its contractual obligations.

Potential Mitigations

• A franchise accountant should always be engaged to conduct a thorough review of the franchisor's financial statements, including all footnotes.
• Understanding revenue sources, such as the balance between initial fees and ongoing royalties, can provide insight into the business model's maturity, a topic for discussion with your financial advisor.
• It is wise to have your accountant help you assess the franchisor's balance sheet for a strong net worth and sufficient cash flow.

Explanation

This risk was not identified. Item 20 data from 2022 to 2024 shows zero terminations, non-renewals, or other cessations of franchised outlets. Low turnover can be a positive indicator of franchisee satisfaction and system health, suggesting that franchisees may be achieving their business goals. A high turnover rate, conversely, could signal systemic problems.

Potential Mitigations

• Speaking with former franchisees listed in Item 20, if any, is a critical due diligence step that your attorney can help you prepare for.
• An accountant can help you analyze the turnover rates presented in Item 20 over a three-year period to identify any negative trends.
• A business advisor can assist in comparing a system's franchisee turnover rate against available industry benchmarks to assess its relative stability.

Explanation

This risk was not identified, as Item 20 data indicates the system has grown by only one franchised unit over the past three years. While slow growth can have its own considerations, the risk associated with over-expansion straining support systems does not appear present. Rapid growth can sometimes lead to a franchisor's inability to provide adequate franchisee support.

Potential Mitigations

• A business advisor can help evaluate if a franchisor's support infrastructure, staffing, and financial resources are sufficient to handle its pace of growth.
• Inquiring with both new and established franchisees about the current quality and responsiveness of franchisor support is a crucial due diligence step.
• Your accountant should review the franchisor's financials to determine if they are investing profits back into the system to support expansion.

Explanation

This risk was not identified. Item 1 indicates the franchisor has been in business since 2014, and the concept was founded in 2011. Item 20 data shows a stable base of over a dozen franchised outlets operating for several years. This suggests a mature and proven system, unlike new systems which may carry higher risks related to unproven models and support infrastructure.

Potential Mitigations

• For any new system, it is vital to have your business advisor help you conduct extra due diligence on the concept's long-term viability and profitability.
• An attorney should be consulted to potentially negotiate more franchisee-favorable terms to offset the higher risks of an unproven system.
• Your accountant can assess if a new franchisor is adequately capitalized to weather initial challenges and support its first franchisees.

Explanation

This risk does not appear to be present. The business model is based on the established markets of upscale casual dining and craft beer, which have demonstrated sustained consumer demand for many years. A franchise concept's long-term viability is crucial, as a business tied to a short-lived trend could face significant challenges once public interest fades.

Potential Mitigations

• A business advisor can help you research the long-term market demand for the franchise's core products or services.
• It is prudent to assess the concept's adaptability and resilience to economic downturns or shifts in consumer tastes with your financial advisor.
• Reviewing the franchisor's history of innovation and product development with a business advisor can provide insight into its potential longevity.

Explanation

This risk was not identified. Item 2 details a management team with extensive, long-term experience in both the restaurant industry and in operating this specific concept. The CEO founded the brand in 2011, and the VP of Operations has three decades of relevant experience. Experienced leadership is important as it can positively influence training, support, and strategic direction for franchisees.

Potential Mitigations

• A thorough review of the executive team's background in Item 2 with a business advisor is essential to gauge their experience in both the industry and in franchising.
• Speaking with current franchisees provides valuable, real-world insight into the quality and effectiveness of the management team's support.
• Your attorney can help you ask targeted questions about the management team's history and long-term vision for the franchise system.

Explanation

This risk was not identified. Item 1 and the financial statements indicate the franchisor is privately held by its founder and not owned by a private equity firm. This is notable because PE ownership can sometimes introduce pressures for short-term returns over the long-term health of the franchise system, potentially affecting franchisee support and fee structures.

Potential Mitigations

• When a franchisor is PE-owned, a business advisor can help research the firm's history with other franchise brands.
• It is important to ask current franchisees about any changes to the system's culture or support levels since a PE acquisition.
• Your attorney should review the Franchise Agreement for any terms that give a PE owner excessive rights to change fees or sell the system.

Explanation

This risk was not identified. Item 1 clearly discloses the parent and affiliate companies. The franchisor's own audited financial statements are provided and indicate strong financial health, negating concerns about reliance on an undisclosed or financially weak parent entity. Proper disclosure of parent companies is crucial for a complete assessment of the system's overall structure and stability.

Potential Mitigations

• If a franchisor is a subsidiary, your attorney should confirm whether the parent company guarantees the franchisor's obligations.
• An accountant should review the financials of both the franchisor and any guaranteeing parent to assess the entire system's financial strength.
• A business advisor can help investigate the reputation and track record of a parent company that is not well known.

Explanation

This risk was not identified, as Item 1 does not disclose any predecessors for the franchisor. The franchisor entity appears to be the original developer and operator of the franchise system. Understanding a predecessor's history is important as it can reveal inherited issues related to litigation, bankruptcy, or franchisee relations that could affect the current system.

Potential Mitigations

• When a predecessor is listed, an attorney should be consulted to analyze any associated litigation or bankruptcy disclosures in Items 3 and 4.
• It is wise to ask long-tenured franchisees about their experience under any previous ownership.
• A business advisor can assist in researching a predecessor's public reputation and history.

Explanation

This risk was not identified. Item 3 explicitly states that no litigation is required to be disclosed, which is a positive indicator. A pattern of litigation, particularly franchisee-initiated lawsuits alleging fraud or breach of contract, can be a significant red flag about a franchisor's business practices and the overall health of the franchise relationship.

Potential Mitigations

• Your attorney should always carefully review the nature, frequency, and outcomes of any lawsuits disclosed in Item 3.
• Asking current franchisees about the litigation history and the franchisor's general approach to disputes can provide valuable context.
• A business advisor can help you understand if the volume of litigation is unusual for a system of its size and age.