Explanation

This risk was not identified in the FDD package, as the system has recently seen a net decrease in the number of outlets, not rapid growth. Generally, when a franchise system expands too quickly, a franchisor's support infrastructure can be strained, potentially leading to inadequate training, site selection assistance, and ongoing operational guidance for new franchisees, which can jeopardize their success.

Potential Mitigations

• A business advisor can help you evaluate a franchisor's growth plans and assess whether their support infrastructure seems adequate for future franchisees.
• When interviewing current franchisees, it's wise to ask about the quality and responsiveness of the support they receive from the corporate office.
• An accountant's review of the franchisor's financial statements can offer insights into their capacity to invest in necessary support staff and systems.

Explanation

This specific risk was not identified, as The Halal Guys Franchise Inc. (THGFI) has been franchising for over a decade and has a significant number of operating units. For new or emerging franchise systems, there is an inherent risk due to the business model being unproven in a franchise context. This can lead to challenges with brand recognition, operational procedures, and the franchisor’s ability to provide robust support.

Potential Mitigations

• When evaluating a newer franchise, it is critical to have a business advisor help you scrutinize the experience of the management team in both the industry and in franchising.
• Speaking with the very first franchisees to join a new system can provide invaluable insight into the franchisor's learning curve and support evolution.
• A thorough review of a new franchisor's capitalization by your accountant is crucial to ensure they have the funds to support initial growth.

Explanation

This risk does not appear to be present. The Halal Guys concept is based on a long-standing street food model with established demand, rather than a new or fleeting trend. A "fad" business carries the risk that its popularity may be short-lived. Once consumer interest wanes, franchisees can be left with a failing business while still being bound by a long-term franchise agreement and lease.

Potential Mitigations

• To assess long-term viability, a business advisor can help you research the target market and the product's history beyond current trends.
• Question the franchisor about their plans for menu innovation and adapting to changing consumer tastes.
• When speaking with long-term franchisees, inquire about how customer demand has evolved over the years.

Explanation

This risk was not identified in the FDD package. Item 2 indicates that the key executives possess extensive experience with the brand and within the restaurant industry, some for over a decade. Inexperienced management can pose a significant risk, as they may lack the expertise to develop robust systems, provide effective franchisee support, or navigate competitive challenges, potentially jeopardizing the entire franchise network.

Potential Mitigations

• When reviewing any FDD, have a business advisor help you scrutinize the biographies in Item 2 to assess the management team's direct experience in both the industry and franchising.
• Asking current franchisees about their perception of the management team's competence and strategic direction is a crucial due diligence step.
• Your attorney can help you research the professional history of key executives for a more complete picture.

Explanation

This risk does not appear to be present, as Item 1 does not indicate ownership by a private equity firm. When a PE firm owns a franchisor, there can be a risk that strategic decisions are driven by short-term financial goals, such as a quick sale of the company, rather than the long-term health of the brand and the profitability of its franchisees.

Potential Mitigations

• If a franchisor is PE-owned, it's wise to have your business advisor research the firm's history with other franchise brands.
• Asking franchisees about any changes in support or culture since a PE acquisition can provide valuable insight.
• Your attorney should review the assignment clause in the franchise agreement to understand how easily the system can be sold.

Explanation

This risk was not identified. The FDD states the franchisor has no parent company, although it does disclose a key affiliate that owns the trademarks. A failure to disclose a parent company can be a risk if the franchisor is a thinly capitalized entity, as it might obscure the true financial backing and stability of the system. Without the parent's financials, you may not have a complete picture.

Potential Mitigations

• Your attorney can review a franchisor's corporate structure to confirm the accuracy of disclosures regarding parent companies or controlling entities.
• If the franchisor is a newly formed subsidiary, a franchise accountant should insist on reviewing the parent company's financials for a complete risk assessment.
• Asking your attorney to verify if any guarantees are provided by a parent or affiliate entity is an important step.

Explanation

This risk is not applicable as the FDD states the franchisor has no predecessors. Generally, if a franchisor acquired the system from a predecessor, it is important to review the predecessor's history for issues like litigation, bankruptcy, or high franchisee turnover. Inadequate disclosure about a predecessor's past problems could hide systemic issues that you might inherit as a new franchisee.

Potential Mitigations

• If a predecessor is listed in Item 1, your attorney should carefully review their litigation and bankruptcy history in Items 3 and 4.
• A business advisor could assist in researching public information or news articles related to the predecessor's performance and reputation.
• Contacting long-term franchisees who operated under the predecessor can provide firsthand accounts of the system's history.