Explanation

This risk was not identified in the FDD package. Rapid system growth can strain a franchisor's resources, potentially leading to inadequate support for franchisees. It is important to assess whether a franchisor's support infrastructure is growing at a sustainable pace along with its number of franchise units.

Potential Mitigations

• Engaging a business advisor to evaluate the franchisor's growth plans in relation to its support staff and financial resources can be beneficial.
• Speaking with franchisees who joined at different times can provide your attorney with insight into how support levels have changed over time.
• An accountant's review of the franchisor's financials can help determine if they have allocated sufficient capital to support expansion.

Explanation

This risk was not identified in the FDD package. A business concept tied to a fleeting trend can face a dramatic decline in consumer demand, potentially leading to business failure even if the contractual obligations remain. Assessing whether a franchise offers a sustainable product or service versus a short-term fad is a key part of due diligence.

Potential Mitigations

• Independent market research, perhaps with the help of a business advisor, is necessary to evaluate the long-term consumer demand for the services offered.
• Questioning the franchisor about their long-term vision and plans for innovation and adaptation can provide insight into sustainability.
• Your financial advisor can help assess the business model's resilience to shifts in consumer taste and economic cycles.

Explanation

The FDD does not indicate that the franchisor is owned by a private equity firm. When this is the case, there can be a risk that the ownership's focus on short-term returns may not align with the long-term health of the franchisees and the brand. It is a factor to consider in the overall stability and philosophy of the franchisor.

Potential Mitigations

• Should you encounter this with another franchisor, researching the private equity firm's history with other franchise brands is a crucial step for your business advisor.
• In such cases, your attorney should carefully examine the franchisor's rights to sell or assign the system.
• Discussing any changes since a PE acquisition with existing franchisees would be an important part of due diligence.

Explanation

This risk was not identified in the FDD package. The franchisor, Square Cow, has disclosed its affiliate, Square Cow Moovers, LLC. In some franchise systems, a parent company's role and financial health can be critical, and the failure to disclose required parent financials can obscure significant risks. Proper disclosure ensures a transparent view of the entire corporate structure supporting the franchise.

Potential Mitigations

• If a franchisor is a new or thinly capitalized subsidiary, your attorney should verify if parent company financials are required by law to be disclosed.
• Your accountant should always review any provided parent company financials and guarantees to assess the true financial backing of the system.
• A business advisor can help investigate the corporate structure and the role of any parent or affiliate entities.

Explanation

This risk was not identified in the FDD package, as Square Cow is a new franchisor and has no predecessors. For established systems that have been bought or sold, reviewing the history of predecessors is important. A predecessor's history of litigation, bankruptcy, or high franchisee turnover could indicate inherited problems within the system that may affect new franchisees.

Potential Mitigations

• In a different FDD, your attorney should carefully scrutinize Items 1, 3, and 4 for any disclosed predecessor information.
• A business advisor can assist in researching the public record and reputation of any predecessor entity.
• Asking long-term franchisees about their experiences under previous ownership would be a key due diligence step.

Explanation

This risk was not identified in the FDD package. Item 3 discloses no litigation history, which is positive but expected for a franchisor entity that is very new. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems in a franchise.

Potential Mitigations

• When reviewing other FDDs, it is crucial that your attorney analyze the nature, status, and outcomes of any disclosed litigation.
• A high number of lawsuits filed by the franchisor against franchisees can also be a warning sign of an overly aggressive or litigious culture.
• Independent research into court records can sometimes provide more context than the FDD disclosure alone; a business advisor can help.