Explanation

As a new franchise system that has not yet sold any franchises, there is no historical data on franchisee turnover. This lack of a track record means you cannot assess system satisfaction or unit-level success rates based on past performance. While not a negative indicator in itself, investing in a system without a history of retaining franchisees is inherently riskier, as the viability of the franchise model from a franchisee's perspective is entirely unproven.

Potential Mitigations

• Your business advisor should help you perform extensive due diligence on the underlying business model's long-term viability.
• A frank discussion with the single affiliate-owned store's management about their operational experience could provide some insight.
• An accountant can help you create financial projections with higher contingency funds to account for the unproven nature of the system.

Explanation

This risk is not currently present as the franchisor has no existing franchisees and therefore no history of rapid growth. However, given it is a new system associated with a celebrity name, there is potential for rapid franchise sales. A franchisor expanding too quickly can strain its ability to provide adequate site selection, training, and operational support, potentially harming the entire system. You should monitor the pace of growth if you decide to invest.

Potential Mitigations

• Discuss the franchisor's specific plans for scaling its support staff and systems to match franchise sales growth with your business advisor.
• If you invest, your attorney might suggest networking with other early franchisees to monitor the quality of support as the system expands.
• During your due diligence, asking the franchisor about their capacity for support is a key question for your business advisor to explore.

Explanation

The FDD does not indicate ownership by a private equity firm. However, this is a risk to be aware of in franchising generally. PE firms often have specific investment timelines and may prioritize short-term returns, which can sometimes lead to reduced franchisee support, increased fees, or a quick sale of the franchise system. A sale could result in a new owner with a different philosophy or less capability, impacting your investment and long-term relationship.

Potential Mitigations

• Your attorney can help you research the ownership structure of any franchise system you are considering.
• Discussing the franchisor's long-term vision and commitment to the brand with a business advisor is a worthwhile exercise.
• It is wise to have your attorney review the assignment clauses in the Franchise Agreement to understand your rights if the system is sold.

Explanation

This risk was not identified in the FDD Package. The franchisor does not disclose any predecessors. In general, it is important to review predecessor history because the current franchisor may have inherited systemic issues, a negative brand reputation, or a history of litigation or franchisee failures from a previous owner of the system. A clean slate, as in this case, means the focus shifts to the risks of a new, unproven system.

Potential Mitigations

• Your attorney should always verify the predecessor information disclosed in Item 1 of any FDD.
• When a predecessor exists, independent research into their business history can provide valuable context for your business advisor.
• Asking long-term franchisees about their experience under any previous ownership is a critical due diligence step.

Explanation

This risk was not identified in the FDD Package, as Item 3 states there is no litigation to disclose. This is a positive sign for a new system. Prospective franchisees should always carefully review Item 3, as a pattern of lawsuits filed by franchisees alleging fraud or misrepresentation, or a high number of suits filed by the franchisor against its franchisees, can be a major red flag indicating systemic problems or a contentious relationship.

Potential Mitigations

• A franchise attorney's review of any disclosed litigation in Item 3 is crucial to understand the nature and potential impact of the disputes.
• Independent legal research on disclosed cases can provide additional context beyond the franchisor's summary.
• Speaking with franchisees involved in past or pending litigation can offer invaluable, firsthand insight into the franchisor's conduct.