Explanation

The information in Item 20 does not indicate an unusually high rate of franchisee turnover. In 2024, the system had one termination out of 58 total outlets at the start of the year, which is not alarming. However, a franchisee should always understand turnover rates as they can signal systemic issues like unprofitability or poor franchisor support. Monitoring these trends is crucial for assessing the long-term health and stability of the franchise system.

Potential Mitigations

• It is wise to have your accountant analyze the provided Item 20 data for any negative trends over the three-year period.
• Contacting former franchisees listed in the FDD can provide direct insight into why they left the system; a business advisor can help prepare questions.
• Your attorney should help you understand the definitions the franchisor uses for categories like 'transfers' versus 'terminations' to ensure clarity.

Explanation

This risk was not identified in the FDD. Rapid system growth can strain a franchisor's ability to provide adequate support, training, and quality control. If a franchisor's support infrastructure does not keep pace with its unit growth, new and existing franchisees may suffer from a decline in service quality. It is a key indicator of potential future operational problems that you should assess.

Potential Mitigations

• Engage a business advisor to evaluate if the franchisor's support staff and systems are sufficient for the projected growth shown in Item 20.
• It's prudent to ask current franchisees about the quality and timeliness of the support they receive from the corporate office.
• Your accountant can review the franchisor's financial statements in Item 21 to assess if they are investing sufficiently in support infrastructure.

Explanation

This risk was not identified in the FDD. Businesses centered on a new or fleeting trend carry the risk of declining consumer interest over time. If a concept is a fad, its long-term viability is questionable, and your investment could be jeopardized once the trend fades. Assessing whether a business has sustainable, long-term market demand versus temporary novelty appeal is a crucial piece of due diligence for any prospective franchisee.

Potential Mitigations

• A business advisor can help you research the industry to determine if the core product has long-term market demand or is tied to a short-term trend.
• It's wise to evaluate the franchisor's plans for innovation and adaptation to changing consumer tastes.
• Your financial advisor can help assess the business model's resilience to economic shifts and evolving market preferences.

Explanation

This risk was not identified in the FDD. The franchisor, Shah's Halal, and its parent are described as family/founder-owned entities. When a franchisor is owned by a private equity firm, there is a potential risk that business decisions could prioritize short-term investor returns over the long-term health of franchisees. This can sometimes manifest as reduced support, increased fees, or a focus on rapid franchise sales.

Potential Mitigations

• It's good practice to ask your attorney to confirm the ownership structure of the franchisor and any parent companies.
• A business advisor can help research the ownership's track record if they have other business interests.
• Understanding the long-term vision of the ownership group is a key piece of due diligence.

Explanation

The FDD discloses that Shah's Halal is a wholly owned subsidiary of Shah's Halal Food Partners, Inc. (Parent). The FDD includes audited financial statements for both the franchisor and the parent company, along with a guarantee of performance from the parent. The disclosure of the parent and the provision of its financials and a guarantee are positive signs of transparency and mitigate the risk of a thinly capitalized subsidiary, though the parent's financials should still be reviewed carefully.

Potential Mitigations

• Your accountant should thoroughly review the financial statements for both the franchisor and the parent entity to assess their combined financial health.
• It is important to have your attorney review the terms of the parent company guarantee to understand its scope and enforceability.
• A business advisor can help you understand the relationship and operational dependence between the franchisor and its parent.

Explanation

This risk was not identified in the FDD. Item 1 does not disclose any predecessors. A predecessor is a company from which the franchisor acquired the main assets of the business. If a franchisor has a predecessor, it is important to investigate that company's history, including any litigation or bankruptcy, as it could reveal inherited problems or risks for the franchise system that may not be immediately apparent from reviewing the current franchisor's information alone.

Potential Mitigations

• Your attorney should always confirm whether a predecessor exists by carefully reviewing Item 1 of the FDD.
• If a predecessor is identified, a business advisor can help you conduct due diligence on that entity's history.
• Asking existing long-term franchisees about their experience under any previous ownership is a valuable research step.