Explanation

This risk was not identified. The audited financial statements in Exhibit G, prepared by KPMG, show Taco Bell Franchisor, LLC (Taco Bell LLC) to be in strong financial health. It reports significant and growing net income ($729 million in 2024) and positive member's equity ($53.3 million in 2024). Financial weakness can signal a franchisor's inability to support its franchisees.

Potential Mitigations

• An experienced franchise accountant should always review the franchisor's financial statements, including footnotes and the independent auditor's report.
• Analyzing financial trends over the three years presented for signs of declining revenue or profitability is a crucial step for your accountant to perform.
• Your business advisor can help you understand the context of the financial statements in relation to the franchisor's overall system size and support obligations.

Explanation

This risk was not identified. Item 20 data does not indicate excessively rapid growth that would strain the resources of a large, established system like Taco Bell. Overly fast expansion can be a concern if it outpaces a franchisor's ability to provide adequate training, site selection, and operational support, potentially harming franchisee performance and brand standards.

Potential Mitigations

• Your business advisor should help you evaluate the franchisor's support staff and infrastructure in relation to its current and projected unit growth.
• It is wise to ask existing franchisees about the current quality and responsiveness of franchisor support.
• Have your accountant review the franchisor's financial statements to assess if they have the capital and cash flow to support system growth.

Explanation

This risk was not identified. Taco Bell is a large, mature franchise system that has been in business for over 60 years, as detailed in Item 1. Investing in a new or unproven system carries higher risks, as the business model may be untested, brand recognition could be low, and the franchisor might lack the experience and resources to provide adequate support.

Potential Mitigations

• When considering a new system, it is crucial for a business advisor to help you vet the management team's experience in both the specific industry and franchising.
• An accountant should be tasked with scrutinizing the capitalization of an emerging franchisor to ensure it can fund its support obligations.
• Speaking with the earliest franchisees of a new system is essential for due diligence.

Explanation

This risk was not identified. Taco Bell is a well-established brand in the quick-service restaurant industry and is not based on a recent or fleeting trend. A 'fad' business model poses a risk because its popularity may be short-lived, potentially leading to a decline in customer demand and sales long before your franchise agreement term expires, jeopardizing your investment.

Potential Mitigations

• A business advisor can help you assess the long-term market demand for any franchise's core products or services.
• Evaluating a franchisor's commitment to research, development, and innovation, as described in Item 11, can provide insight into its long-term viability.
• Your financial advisor should help you consider a concept's resilience to economic shifts and changing consumer tastes.

Explanation

This risk was not identified. The executive team described in Item 2 has extensive experience with Taco Bell, its parent company YUM! Brands, and other major corporations in the food service and marketing industries. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, weak operational systems, and inadequate franchisee support.

Potential Mitigations

• Always have your business advisor help you thoroughly vet the background and relevant experience of a franchisor's key management team.
• It is wise to ask existing franchisees about their direct experiences with the leadership team's competence and support.
• If a management team is new to franchising, your attorney can help determine if they have engaged experienced franchise consultants.

Explanation

This risk was not identified in the sense of a typical private equity fund. However, the franchisor is part of a complex corporate structure under its ultimate parent, YUM! Brands, Inc., a publicly-traded company. The system also underwent a securitization transaction, which introduces obligations to noteholders. This structure means decisions could be influenced by public market pressures or debt service requirements, which may differ from a founder-led company's priorities.

Potential Mitigations

• A business advisor can help you research the corporate owner's history and reputation within the franchise industry.
• Speaking with franchisees about any changes in system direction or support levels under the current ownership structure is an important step.
• Your attorney should explain any risks associated with the franchisor's ability to sell the entire system.

Explanation

This risk was not identified. Item 1 clearly discloses the parent companies, including Taco Bell Corp., Taco Bell Franchisor Holdings, LLC, and the ultimate parent, YUM! Brands, Inc. Failure to disclose a parent company can obscure the true financial backing and stability of the franchisor, hiding potential risks from prospective franchisees.

Potential Mitigations

• Your attorney should always verify the corporate structure if there is any ambiguity about a controlling parent entity.
• If a parent company provides a financial guarantee, it is critical for your accountant to review the parent's financial statements.
• Ensure any guarantees from a parent company are documented in an enforceable agreement, which your attorney can review.

Explanation

This risk was not identified. Item 1 clearly describes Taco Bell Corp. as the predecessor, from which Taco Bell LLC acquired its franchising rights as part of a 2016 financing transaction. The history of the predecessor appears to be seamlessly integrated into the disclosures. A failure to disclose or properly describe predecessor history can obscure past issues like litigation or high franchisee failure rates.

Potential Mitigations

• Your attorney should carefully review any disclosures related to predecessors in Items 1, 3, and 4.
• A business advisor can assist in researching a predecessor's public track record if the system was acquired from a different company.
• Asking long-term franchisees about their experience under any previous ownership is a valuable due diligence step.

Explanation

This risk was not identified. Item 3 states that there is no litigation required to be disclosed against the franchisor, its parent, or affiliates. A pattern of franchisee-initiated lawsuits alleging fraud or misrepresentation would be a significant red flag, suggesting potential systemic issues with the franchisor's practices. Similarly, a high volume of lawsuits initiated by the franchisor against franchisees could indicate an overly aggressive relationship.

Potential Mitigations

• Your attorney should always carefully review the details of any litigation disclosed in Item 3.
• It is prudent to conduct independent online searches for news or discussions related to litigation involving the franchisor, with the help of your business advisor.
• You should discuss any disclosed litigation with current and former franchisees to understand their perspective.