Explanation

This specific risk was not identified as Shaghf Cafe is a new entity with no operating history of master franchises in the US, as shown in Item 20. However, high turnover in a franchise system can be a major red flag, often indicating franchisee dissatisfaction, lack of profitability, or poor franchisor support.

Potential Mitigations

• It is wise to ask your business advisor to help you contact the affiliate's master franchisees listed in Exhibit G to understand their experiences.
• Ongoing monitoring of franchisee success and turnover rates should be part of your due diligence, a task your accountant can assist with.
• Your attorney can help you understand the implications of the New York Master Franchisee ceasing operations as noted in Item 20.

Explanation

This risk is not present, as the franchisor is a new US entity with no existing franchises, according to Item 20. Rapid growth can strain a franchisor's resources, potentially leading to inadequate support for franchisees. While not a current issue, you should monitor the pace of growth if you join the system.

Potential Mitigations

• Engaging a business advisor to periodically assess the quality of franchisor support as the system grows is a good practice.
• Your attorney can review the franchisor's contractual support obligations to see if they are specific enough to be enforceable.
• Discussing the franchisor's plans for scaling its support infrastructure with your accountant can provide valuable insight.

Explanation

This risk was not identified. The business concept, a high-end coffee cafe, is part of a well-established and durable industry, not a temporary trend. Investing in a fad business is risky because customer interest can disappear, leaving you with a long-term contract for a business with no demand.

Potential Mitigations

• A business advisor can help you analyze the long-term market trends for specialty coffee in your specific territory.
• It's always prudent to have your accountant help you develop financial models that account for potential shifts in consumer tastes over time.
• Your attorney can review the agreement for flexibility in adapting the menu or services to future market changes.

Explanation

This risk was not identified. Item 1 indicates the franchisor is owned by an individual, not a private equity firm. PE ownership can sometimes introduce risks related to short-term profit motives, which may not align with the long-term health of franchisees.

Potential Mitigations

• It is still valuable to have your attorney investigate the franchisor's ownership structure to confirm who has ultimate control.
• A business advisor can help you understand the goals and vision of the current ownership for the franchise system's future.
• Your accountant can analyze how the franchisor's capital structure might influence its operational decisions.

Explanation

This risk is not present, as Item 1 appears to disclose the key affiliate relationships and the ultimate individual owner. In some cases, a franchisor might be a subsidiary of a larger, undisclosed parent company, obscuring the true financial backing or risks associated with the controlling entity.

Potential Mitigations

• A franchise attorney can still be useful to verify the corporate structure and ensure all controlling entities are properly disclosed.
• It is important for your accountant to analyze the financial health of any disclosed parent or affiliate that guarantees the franchisor's obligations.
• Your business advisor can help you understand the operational relationships between the franchisor and its affiliates.

Explanation

This risk was not identified, as the franchisor is a new US entity and does not have a predecessor, according to Item 1. Sometimes, a new franchisor is formed after acquiring the assets of a failed or troubled system, and failing to disclose this "predecessor" history can hide past problems from prospective franchisees.

Potential Mitigations

• A business advisor can help you research the history of the "Shaghf" brand internationally to look for any relevant background information.
• Your attorney should review Item 1 carefully to ensure the definitions of affiliate and predecessor are correctly applied.
• Discussing the history of the affiliate's master franchise sales with your attorney is recommended.

Explanation

No litigation was disclosed in Item 3. A pattern of lawsuits, especially claims of fraud or misrepresentation brought by other franchisees, can be a major warning sign about the franchisor's business practices and the health of the system.

Potential Mitigations

• It is a prudent step to have your attorney conduct an independent search for any legal actions involving the franchisor or its principals.
• Speaking with current and former franchisees, as recommended by a business advisor, can reveal disputes that didn't escalate to litigation.
• Your accountant can review financials for any hints of litigation reserves or contingent liabilities.