Explanation

This risk was not identified in the FDD Package. As Soup Korner is a new franchise system with no existing franchisees, there is no history of franchisee turnover to analyze in Item 20. For established systems, a high rate of terminations, non-renewals, or closures can be a critical warning sign of systemic problems, franchisee dissatisfaction, or lack of profitability. This data is a key indicator of the health and viability of a franchise system.

Potential Mitigations

• When evaluating an established franchise, it is crucial to have an accountant help you analyze the turnover rates in Item 20 over three years.
• A discussion with your attorney can help you formulate questions for former franchisees to understand why they left the system.
• Your business advisor can help compare a system's turnover rate to industry averages to gauge its relative health.

Explanation

This risk was not identified in the FDD Package. Item 20 data shows that Soup Korner has not yet sold any franchises, so there is no evidence of rapid system growth. In other franchise systems, very fast expansion can be a risk if the franchisor's support infrastructure, such as training and field support staff, does not grow at the same pace. This can lead to a decline in the quality of support for all franchisees.

Potential Mitigations

• For a rapidly growing system, it is wise to ask your business advisor to help assess whether the franchisor's support systems are scaling appropriately.
• A conversation with your accountant can help determine if the franchisor is investing sufficiently in support infrastructure.
• Your attorney can help you question a wide range of franchisees about their perception of support quality during periods of high growth.

Explanation

This risk was not identified in the FDD Package. There is no indication in Item 1 that Soup Korner is owned or controlled by a private equity firm. When a franchisor is PE-owned, there can be a risk that decisions are driven by short-term financial targets for investors rather than the long-term health of the brand and its franchisees. This can sometimes manifest as reduced support, increased fees, or pressure to use affiliated vendors.

Potential Mitigations

• If considering a PE-owned franchise, a business advisor can help you research the firm's reputation and track record with other franchise brands.
• It would be prudent to ask your attorney to determine if there are any unusual transfer or assignment rights in the Franchise Agreement.
• Talking to franchisees who have been with the system before and after a PE acquisition can provide valuable insights.

Explanation

This risk was not identified in the FDD Package. Item 1 states that Soup Korner has no parent company. In some franchise systems, the franchisor entity is a subsidiary of a larger parent company. If the subsidiary is thinly capitalized or relies on the parent for key support or supplies, the parent's financial stability becomes crucial. The law may require the parent's financial statements to be disclosed in such cases to provide a complete picture of the franchise system's backing.

Potential Mitigations

• Your attorney can help you verify a franchisor's corporate structure if you suspect there is an influential but undisclosed parent entity.
• If a parent company exists and provides a guarantee, an accountant should review both the franchisor's and the parent's financial statements.
• Understanding the legal and operational relationship between a franchisor and its parent is a key step your attorney can assist with.

Explanation

This risk was not identified in the FDD Package. Item 1 does not list any predecessors for Soup Korner, as it is a new company that started the business itself. When a franchisor has acquired a business from a predecessor, it's important to investigate the predecessor's history. Past issues, such as high franchisee failure rates, litigation, or bankruptcy under previous ownership, could indicate underlying problems with the business model that may persist under new management.

Potential Mitigations

• When a predecessor is disclosed, your attorney should carefully review their litigation and bankruptcy history in Items 3 and 4.
• A business advisor can assist in researching the predecessor's public reputation and history.
• Speaking with long-term franchisees who operated under the predecessor can provide invaluable historical context.

Explanation

This risk was not identified in the FDD Package. Item 3 states that Soup Korner has not been involved in any litigation. For other franchise systems, a pattern of lawsuits disclosed in Item 3, particularly those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may signal systemic issues within the franchisor's operations, sales process, or franchisee relationships. A high volume of litigation initiated by the franchisor can also indicate an aggressive approach.

Potential Mitigations

• If Item 3 discloses litigation, your attorney should be retained to analyze the nature and outcomes of the cases.
• Independent research into disclosed lawsuits can often provide more context than the FDD summary; your attorney can guide this process.
• A business advisor can help you gauge whether the amount of litigation is unusual for a system of its size and age.