Explanation

The franchisor’s audited financial statements appear healthy. For fiscal year 2024, the company reported positive and growing net worth, positive net income, and a strong current ratio. Royalties, rather than initial franchise fees, constitute the primary source of revenue, which suggests a more stable business model. No significant financial instability risks were identified from the provided statements.

Potential Mitigations

• An experienced franchise accountant should review the franchisor's financial statements, including footnotes and cash flow statements, to provide an independent assessment of their stability.
• It is beneficial to discuss the franchisor's financial health and future investment plans with your business advisor.
• In discussions with existing franchisees, asking about their perception of the franchisor’s financial support and long-term stability can provide valuable context.

Explanation

This risk was not identified. The franchisor was founded in 2014 and has over a decade of operating and franchising history with multiple units. An unproven system presents higher risks because its business model, brand recognition, and support structures are not yet fully established or validated in the marketplace, leading to greater uncertainty for new franchisees.

Potential Mitigations

• When evaluating any franchise, it is beneficial for your business advisor to assess the franchisor's operational history and the maturity of its systems.
• An accountant should always analyze the franchisor's financial statements to determine if they have a track record of profitability and stability.
• Legal counsel can help you understand any additional risks associated with investing in a newer, less established franchise system.

Explanation

This risk was not identified. The franchise concept is a traditional oyster bar and seafood restaurant, a well-established segment of the restaurant industry. A fad business is one based on a short-lived trend, which can pose a significant risk to franchisees who are locked into long-term agreements that may outlast the concept's popularity.

Potential Mitigations

• Your business advisor can help you conduct independent market research to assess the long-term consumer demand for any franchise concept's products or services.
• Evaluating a franchisor's plans for innovation, menu development, and adaptation to changing consumer tastes is a crucial step.
• Consider the business model's resilience to economic shifts and its sustainability beyond current trends with your financial advisor.

Explanation

This risk was not identified. Item 2 of the FDD indicates that the key executives and managing members have been with the franchise system since its formation in 2014 or have extensive prior experience in the restaurant industry. Inexperienced management can be a risk if the leadership team lacks the necessary background in franchising or their specific industry to provide effective support.

Potential Mitigations

• It is always prudent to have your business advisor thoroughly vet the background and specific franchising experience of the key management team.
• Speaking with existing franchisees about their perception of management's competence and the quality of support they receive is a valuable due diligence step.
• Your attorney can help you assess if the management team's disclosed experience aligns with the support obligations promised in the Franchise Agreement.

Explanation

This risk was not identified. According to Item 1 and the notes to the financial statements, the franchisor is a wholly owned subsidiary of a holding company, which does not appear to be a private equity firm. Private equity ownership can sometimes introduce risks related to prioritizing short-term investor returns over the long-term health of the franchisees and the brand.

Potential Mitigations

• When a franchisor is owned by a private equity firm, it is wise to have your business advisor research the firm's track record with other franchise systems.
• Your attorney should review any terms in the Franchise Agreement that allow the franchisor to sell the system and explain the implications for your investment.
• Discussing any changes in support or system direction since a private equity acquisition with existing franchisees can provide valuable insight.

Explanation

This risk was not identified. The FDD discloses that the franchisor is a wholly owned subsidiary of Cheyenne's Ruby's Holding Company, LLC. A risk can arise if a franchisor is a thinly capitalized subsidiary of a larger parent, and the parent company's financials are not provided, as this can obscure the true financial backing of the system.

Potential Mitigations

• Your accountant should always review the franchisor's financial statements to determine if it appears adequately capitalized on its own.
• If a parent company provides a guarantee, your attorney should ensure this guarantee is a formal, legally binding document attached as an exhibit.
• In cases of a newly formed franchisor subsidiary, a business advisor can help assess the operational and financial strength of the overall enterprise.

Explanation

This risk was not identified. Item 1 of the FDD clearly states that the franchisor has no predecessors. A predecessor is a company from which the franchisor acquired the rights to the franchise system. A history of predecessors can sometimes indicate instability or past issues with the brand, which a new franchisor might inherit or obscure.

Potential Mitigations

• Your attorney should always verify the predecessor information disclosed in Item 1 of the FDD.
• If predecessors are disclosed, it's important to research their history for any signs of bankruptcy, litigation, or high franchisee turnover with your business advisor.
• Inquiring with long-term franchisees about their experience under any previous ownership can reveal important information about the system's history.

Explanation

This risk was not identified. Item 3 of the FDD states that there is no litigation that requires disclosure. A pattern of litigation, particularly lawsuits initiated by franchisees alleging fraud or misrepresentation, can be a significant red flag indicating systemic problems within a franchise. A high volume of lawsuits initiated by the franchisor against franchisees can also suggest an overly aggressive or litigious culture.

Potential Mitigations

• Your attorney should always carefully review the details of any lawsuits disclosed in Item 3.
• A business advisor can help you analyze whether the number and nature of lawsuits are typical for a system of its size and age.
• If litigation is a concern, discussing the matter with current and former franchisees can provide valuable firsthand perspectives.