Explanation

This risk was not identified in the FDD Package. Rapid, uncontrolled growth can strain a franchisor's ability to provide necessary support, training, and quality control to all its franchisees. A system expanding faster than its support infrastructure can lead to diluted brand standards and franchisee dissatisfaction. It is a potential sign that a franchisor is prioritizing franchise fee revenue over long-term system health.

Potential Mitigations

• An analysis of the franchise growth rate in Item 20 against the franchisor's size and resources should be conducted with your business advisor.
• Speaking with franchisees who joined at different times can provide your business advisor with insight into whether support levels have kept pace with growth.
• Your accountant can assess if the franchisor's financial statements reflect sufficient investment in support infrastructure to match its growth trajectory.

Explanation

This risk was not identified in the FDD Package. Investing in a new or emerging franchise system carries distinct risks, including an unproven business model, undeveloped operational systems, and minimal brand recognition. The franchisor may lack the experience and financial resources to provide adequate support, potentially leading to a higher failure rate for early franchisees. Thorough due diligence on the management team's experience and the system's capitalization is crucial.

Potential Mitigations

• A comprehensive vetting of the founders' and management's experience in both the specific industry and in franchising should be done with a business advisor.
• An accountant can help you assess if the franchisor is sufficiently capitalized to support its initial franchisees and withstand early challenges.
• Engaging an attorney to potentially negotiate more franchisee-favorable terms can help offset the higher risks associated with a new system.

Explanation

This risk was not identified in the FDD Package. A business concept tied to a fleeting trend or fad carries the risk of a short lifespan. Once public interest wanes, demand for the product or service can decline sharply, potentially leading to business failure even while your long-term contractual obligations to the franchisor remain. It is important to assess whether a business has sustainable, long-term consumer demand.

Potential Mitigations

• A business advisor can help you conduct independent market research to evaluate the long-term consumer need for the product or service.
• It is wise to question the franchisor about their long-term vision and plans for innovation and adaptation beyond current trends.
• With your financial advisor, you can assess the business model's resilience to shifting consumer tastes and economic downturns.

Explanation

This risk was not identified in the FDD Package. Private equity ownership can introduce a focus on short-term profitability and a rapid return on investment, which may not always align with the long-term health of the franchise system or the individual success of franchisees. This can sometimes lead to increased fees, reduced support, or pressure to use affiliated vendors. The potential for the system to be sold again can also create uncertainty.

Potential Mitigations

• Researching the private equity firm's reputation and track record with other franchise concepts can be very informative, a task for your business advisor.
• Discussing any changes in operational focus, fees, or support levels since the acquisition with existing franchisees is recommended.
• Your attorney should review any clauses in the Franchise Agreement related to the assignment or sale of the franchise system.

Explanation

This risk was not identified in the FDD Package. Franchisors sometimes operate through thinly capitalized subsidiaries, while a wealthier parent company remains in the background. If the parent company is not disclosed in Item 1, or if its financial statements are not provided when legally required (e.g., if the parent guarantees the franchisor's performance), you may have an incomplete picture of the true financial strength and stability of the organization you are joining.

Potential Mitigations

• Your attorney should verify the franchisor's corporate structure and identify any undisclosed parent or controlling entities.
• If a parent company's guarantee is offered, it's essential for your accountant to review the parent's financial statements for stability.
• Understanding the legal and financial relationship between the franchisor and any parent entity is a key discussion to have with your attorney.