Explanation

This risk was not identified in the FDD package. Rapid system growth can strain a franchisor's ability to provide adequate support. When a franchisor expands too quickly, resources for training, site selection, and operational guidance can be spread thin, potentially harming franchisee performance and satisfaction. A prospective franchisee should evaluate if the franchisor's support infrastructure is keeping pace with its growth trajectory.

Potential Mitigations

• Question the franchisor on their plans for scaling support infrastructure to match unit growth, a topic your business advisor can help you explore.
• Engaging with a range of existing franchisees can provide insight into the current quality and responsiveness of franchisor support.
• A review of the franchisor's financial statements with your accountant can help assess if they have the resources to support their growth.

Explanation

This specific risk was not identified in the FDD package, as Taco John's International, Inc. (Taco John's) is a long-established system, operating since 1969. For new systems, a lack of a proven track record, minimal brand recognition, and underdeveloped support structures can present significant risks. Investors in new franchises should carefully vet the experience of the management team and the system's financial capitalization to mitigate these potential challenges.

Potential Mitigations

• For any new system, a business advisor can help you conduct extensive due diligence on the founders' and management's industry and franchising experience.
• Speaking with the earliest franchisees provides invaluable insight into a new franchisor's performance and support quality.
• An accountant's review of the capitalization and financial projections is essential to assess the viability of an unproven franchise.

Explanation

This risk was not identified in the FDD package, as fast-casual Mexican food is a well-established market segment. For other concepts, a business model tied to a fleeting trend poses a risk of declining consumer interest, which could harm long-term viability even if your contractual obligations continue. A key consideration is whether the franchisor demonstrates a commitment to innovation and adaptation beyond the initial trend.

Potential Mitigations

• A business advisor can help you assess the long-term market demand for a product or service to distinguish a sustainable business from a novelty.
• It is prudent to evaluate the franchisor's plans for innovation, research, and development to ensure the concept can adapt to changing markets.
• Analyzing the business model's resilience to economic shifts with your financial advisor is a crucial step.

Explanation

This risk was not identified in the FDD package, as there is no disclosure of private equity ownership in Item 1. When a franchisor is owned by a PE firm, there can be a focus on short-term returns, which may lead to decisions that are not in the long-term best interest of franchisees, such as cutting support or increasing fees. The potential for the system to be sold within a few years also creates uncertainty.

Potential Mitigations

• A business advisor can help you research a private equity firm's track record with other franchise concepts it has owned.
• Speaking with franchisees who have operated under PE ownership can provide firsthand accounts of changes in system direction or support.
• Your attorney should review any clauses related to the assignment of the franchise agreement if the system is sold.

Explanation

The FDD discloses that Woodson-Holmes Enterprises, Inc. is a predecessor, having operated and franchised the concept from 1969 until it was merged into the current franchisor entity in 1985. As this transition occurred decades ago and the predecessor no longer exists, it presents minimal direct risk. However, it is always important for a prospective franchisee to understand the full history and lineage of the brand they are investing in.

Potential Mitigations

• It is good practice for your attorney to review all information regarding predecessor entities in Items 1, 3, and 4 of any FDD.
• For any franchise, asking long-tenured franchisees about their experiences under previous ownership can provide valuable historical context.
• A business advisor can assist in researching a predecessor's public track record if there are any concerns about the system's history.

Explanation

This specific risk was not identified in the FDD package. Item 3 discloses one recent arbitration initiated by the franchisor against a franchisee to collect royalty payments, which is a common type of action. The FDD does not show a pattern of litigation where franchisees have sued the franchisor for fraud, misrepresentation, or other systemic issues. A clean litigation history is a positive indicator, but does not eliminate all risks.

Potential Mitigations

• Your attorney should always review the litigation history in Item 3 for any patterns of disputes, especially claims of fraud or broken promises.
• Independent legal research, with assistance from your attorney, can sometimes uncover additional litigation not required to be disclosed in the FDD.
• Discussing any disclosed litigation with current and former franchisees can provide valuable context beyond the FDD summary.