Explanation

The risk of high franchisee turnover was not identified in the FDD. Item 20 data for the past three years shows a relatively low number of closures and transfers compared to the total number of franchised outlets. While this is a positive sign, high turnover in a franchise system can indicate underlying problems with profitability or franchisor support, so this area always warrants careful review.

Potential Mitigations

• It's still crucial to contact a broad sample of current and former franchisees from the lists in Exhibit I to discuss their experiences.
• Your business advisor can help you analyze the Item 20 data for any subtle trends or changes over time.
• Inquire with your attorney about the franchisor's process for handling franchise closures and transfers.

Explanation

The FDD does not indicate that the system is undergoing rapid growth that could strain its support resources. This risk is generally a concern when a franchisor sells franchises faster than it can build its infrastructure to provide adequate training and ongoing assistance, potentially harming franchisee performance. This does not appear to be the case here, as growth is slow and steady.

Potential Mitigations

• Engaging a business advisor can help you evaluate if the franchisor's current support structure is appropriate for its size and modest growth.
• Discuss the franchisor's future growth plans and how they intend to scale support systems with their management.
• Your accountant can review the franchisor's financial investment in support staff and infrastructure.

Explanation

This risk was not identified, as the FDD indicates OPHF is a very mature franchise system, with franchising history since 1991 and over 140 operating units. An unproven system typically carries higher risks related to unrefined operational processes, lack of brand recognition, and potential for franchisor instability. This brand is well-established.

Potential Mitigations

• A discussion with your business advisor can help evaluate the strengths and weaknesses of a mature system versus a new one.
• Reviewing the litigation history in Item 3 with your attorney is important for any system, regardless of age.
• Speaking with long-tenured franchisees can provide insights into the system's evolution and support consistency.

Explanation

This risk was not identified. The franchise operates in the traditional breakfast restaurant segment, a well-established market rather than a temporary trend. A fad business poses a risk because consumer interest can decline rapidly, leaving franchisees with an unsustainable business even if they have long-term contractual obligations. This does not appear to be a concern here given the brand's long history.

Potential Mitigations

• A business advisor can help you research long-term consumer trends in the full-service restaurant industry.
• It is still wise to ask the franchisor about their plans for menu innovation and adapting to changing consumer tastes.
• Your attorney should review the franchisor's obligations for product research and development.

Explanation

This risk was not identified in the FDD. Item 2 indicates the key management personnel have extensive, long-term experience with the company, with the President/Director and Counsel/Consultant having been involved since 1994 and 1997, respectively. Inexperienced management can be a risk if they lack the expertise to support franchisees or manage the system effectively. This team is very experienced.

Potential Mitigations

• Engage a business advisor to help you assess the current management team's strategic vision for the brand.
• It's always beneficial to ask current franchisees about their direct experiences with the management team's responsiveness and support.
• Your attorney can review any recent changes in the management team that might not be fully reflected in the FDD.

Explanation

The FDD does not indicate that the franchisor is owned by a private equity firm. This risk typically arises because PE firms may prioritize short-term returns over the long-term health of the brand, potentially leading to reduced support, increased fees, or a quick sale of the system. This does not appear to be a factor here.

Potential Mitigations

• Your attorney should still confirm the ownership structure and review the franchisor's right to assign the franchise agreement.
• A business advisor can help you understand the pros and cons of different ownership structures.
• Asking the franchisor about their long-term vision for the company is a valuable exercise.

Explanation

This risk was not identified, as Item 1 of the FDD clearly states that the franchisor has no parent company. This risk arises when a franchisor is a subsidiary of another company, and the parent's financial health or influence is material but not properly disclosed. That does not seem to be the case in this FDD.

Potential Mitigations

• It is still good practice for your attorney to verify the corporate structure of the franchisor.
• Your accountant can assess the financial relationship and any transactions with the disclosed affiliate, OPHRI.
• Ask the franchisor to explain the role of any affiliated companies mentioned in the FDD.

Explanation

This risk was not identified, as Item 1 of the FDD states the franchisor has no disclosable predecessors. This is a risk when a franchisor acquires a system from a previous entity, and the history of that predecessor, which could include litigation or bankruptcies, is not fully transparent. This does not appear to apply here.

Potential Mitigations

• Your attorney can conduct public records searches to confirm the franchisor's corporate history.
• A business advisor can help you research the brand's history and reputation in the marketplace.
• Speaking with long-term franchisees can provide insight into the company's origins and evolution.

Explanation

The risk of a problematic pattern of litigation was not identified. Item 3 discloses two recent legal actions, but they were initiated by the franchisor against a single franchisee for royalty collection and judgment enforcement. This appears to be standard contract enforcement rather than a pattern of franchisee claims of fraud or misrepresentation, which would be a significant red flag.

Potential Mitigations

• A review of the litigation history with your attorney is always a crucial step in due diligence.
• Understanding the franchisor's approach to contract enforcement can provide valuable insight into the relationship.
• Ask current franchisees about their perception of the franchisor's fairness in resolving disputes.