Explanation

This risk was not identified in the FDD Package. Item 20 data does not show any franchisee terminations, non-renewals, or other cessations. A high turnover rate can be a critical warning sign of systemic problems, such as franchisee unprofitability or dissatisfaction with the franchisor's support or system. Careful analysis of these numbers is crucial when they are present in an FDD.

Potential Mitigations

• When reviewing an FDD, having an accountant analyze the tables in Item 20 to calculate the actual turnover rate is a valuable step.
• Your business advisor can help you contact former franchisees, when listed, to understand their reasons for leaving the system.
• A discussion with your attorney is important to understand the definitions of termination, transfer, and cessation used in Item 20.

Explanation

This risk was not identified in the FDD Package. Item 20 shows the system is new, with only one franchise opened. Rapid growth can strain a franchisor's ability to provide adequate support, training, and quality control to all units. It is a potential risk to watch for in fast-growing systems, as support infrastructure must scale with unit count to maintain brand standards and franchisee satisfaction.

Potential Mitigations

• In a rapidly growing system, a business advisor can help you assess if the franchisor's support staff and infrastructure are expanding adequately.
• It would be prudent to ask your accountant to review the financials to see if capital is being reinvested into support systems.
• Speaking with franchisees who joined at different stages of growth can provide insight for you and your attorney.

Explanation

This risk was not identified in the FDD Package. The business operates in the well-established Mexican restaurant industry, which is not considered a fad. A fad business is one based on a short-lived trend, which can pose a significant risk to long-term investment, as consumer interest may decline rapidly, leaving you with a worthless business and ongoing contractual obligations.

Potential Mitigations

• A business advisor can help you research the long-term market viability of any industry before investing.
• Your accountant can help you model the financial risks associated with a business concept that has a short history of consumer demand.
• An attorney should review termination clauses to understand your obligations if the business proves to be a fad.

Explanation

This risk was not identified in the FDD Package. Item 2 shows the management team has extensive, long-term experience operating the Taqueria Los Comales restaurant brand. Inexperienced management can be a major risk, as it may lead to poor strategic decisions, inadequate franchisee support, and a failure to develop robust operational systems, even if the business concept itself is sound.

Potential Mitigations

• A thorough review of the executive team's biographies in Item 2 with your business advisor is a key due diligence step.
• Inquiring with existing franchisees about their confidence in the management team can provide valuable insights for you and your attorney.
• An accountant can help assess whether the management team's experience translates into a financially sound operation.

Explanation

This risk was not identified in the FDD Package. Item 1 indicates the company does not have a parent and appears to be privately held by its operators. Private equity ownership can introduce a focus on short-term returns, which may sometimes conflict with the long-term health of the franchise system and the profitability of individual franchisees. This can manifest in cost-cutting on support or pressure for rapid expansion.

Potential Mitigations

• When a franchisor is PE-owned, it's wise to have a business advisor research the firm's history with other franchise brands.
• Your attorney should review assignment clauses to understand what happens if the PE firm sells the franchise system.
• An accountant can analyze financials for signs of aggressive cost-cutting or fee increases common under some PE ownership structures.

Explanation

This risk was not identified in the FDD Package. Item 1 states there is no parent company. When a franchisor is a subsidiary, the financial health of the parent company can be critical. If a parent company's financials are required but not disclosed, it may obscure significant risks, such as the parent being unable to support a struggling or new franchisor entity.

Potential Mitigations

• Your attorney should verify the corporate structure and determine if a parent company exists and if its financials should have been disclosed.
• An accountant can assess the franchisor's own financials to determine if it appears to be a thinly capitalized subsidiary.
• If a parent guarantee is provided, your attorney must ensure it is a meaningful and legally enforceable document.

Explanation

This risk was not identified in the FDD Package. Item 1 states there are no predecessors to the current franchising entity. A predecessor is a company from which the franchisor acquired a major part of its assets. A history of predecessors with issues like bankruptcy or litigation could indicate underlying problems with the business model or management that may carry over to the new entity.

Potential Mitigations

• Your attorney can help you understand the legal definitions of a predecessor and review Item 1 for any such disclosures.
• When predecessors are disclosed, a business advisor can help you research their history for any red flags.
• If a system was acquired from a predecessor, speaking with long-term franchisees can provide valuable historical context.

Explanation

This risk was not identified in the FDD Package, as Item 3 discloses no reportable litigation. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may suggest systemic problems within the franchise, such as unprofitability, inadequate support, or deceptive sales practices. A high volume of litigation initiated by the franchisor can also indicate an overly aggressive relationship.

Potential Mitigations

• When litigation is disclosed in Item 3, your attorney must carefully review the nature, status, and outcomes of all cases.
• A business advisor can help you understand the context of the litigation by speaking with current and former franchisees.
• Your accountant can assess the potential financial impact of ongoing or significant litigation on the franchisor's stability.