Explanation

This risk was not identified in the FDD Package. Rapid system growth can sometimes strain a franchisor's ability to provide adequate support to all franchisees. It is important to assess whether a franchisor's support infrastructure is keeping pace with its unit expansion to ensure new and existing franchisees receive the assistance they need.

Potential Mitigations

• Your business advisor can help you analyze the growth trajectory shown in Item 20 against the support staff described in Item 2.
• It is wise to ask current franchisees if they feel the quality of support has changed as the system has grown.
• An accountant should review the franchisor's financial statements to see if they are reinvesting in support infrastructure.

Explanation

This risk was not identified in the FDD Package. The Spice & Tea Exchange Franchising, LLC (TSTE Franchising) was formed in 2008 and began franchising the same year. The system has a significant number of operational units. Therefore, it does not appear to be a new or unproven system. Investing in a new system carries higher risks due to the lack of a proven track record and established brand recognition.

Potential Mitigations

• When considering a new franchise system, it's crucial to have a business advisor help you scrutinize the prior industry experience of its management team.
• An attorney should be consulted to potentially negotiate more franchisee-favorable terms to offset the higher risk of an unproven concept.
• Engaging an accountant to assess the capitalization of a new franchisor is important to ensure it can fund its initial support obligations.

Explanation

This risk was not identified in the FDD Package. The franchisor operates in the specialty foods retail market, which has a history of sustained consumer interest. While all retail is subject to trends, the business of selling spices, teas, and related goods does not appear to be a short-term fad. A fad business model presents a significant risk, as your long-term contractual obligations could outlast a temporary spike in consumer demand.

Potential Mitigations

• To evaluate if a concept is a fad, a business advisor can help you research the longevity of consumer demand for its core products or services.
• It is prudent to assess a company's plans for innovation and adaptation to stay relevant beyond initial trends.
• A financial advisor can help model the business's potential performance under different market trend scenarios.

Explanation

This risk was not identified in the FDD Package. Item 2 indicates that the key executives have substantial and long-term experience with the company, dating back to its inception in 2008 for several members. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, inadequate franchisee support, and an unrefined business system. This franchisor appears to have an experienced leadership team.

Potential Mitigations

• A business advisor can help you research the background and specific franchise industry experience of a franchisor's leadership team.
• Consulting with current franchisees provides direct insight into their confidence in the management team's competence and strategic direction.
• Your attorney can help you understand the implications if key personnel with critical experience were to leave the company.

Explanation

This risk was not identified in the FDD Package. TSTE Franchising is owned by The Spice & Tea Exchange Holdings, LLC, which does not appear to be a private equity firm. When a franchisor is owned by a private equity fund, there can be a risk that management decisions prioritize short-term returns for investors over the long-term health of the franchise system and individual franchisee profitability.

Potential Mitigations

• A business advisor can help you research the ownership structure of the franchisor and the track record of any parent private equity firm.
• It is important to ask current franchisees about any changes in support, fees, or culture since a private equity acquisition.
• Your attorney should review the assignment clause in the franchise agreement to understand what happens if the system is sold.

Explanation

This risk was not identified in the FDD Package. The FDD discloses that the franchisor is a subsidiary of The Spice & Tea Exchange Holdings, LLC. However, because the franchisor's own audited financial statements are provided and the parent does not guarantee the franchisor's performance, the parent's financials are not required. Omitting a parent company's financials when required can obscure a full picture of the system's financial health.

Potential Mitigations

• An accountant should confirm if a parent company's financial statements are required for disclosure under FTC or state rules.
• Your attorney can help assess the legal and financial relationship between a franchisor and its parent company.
• If a parent company guarantees the franchisor's obligations, you should insist on reviewing its financial statements with your accountant.

Explanation

This risk was not identified in the FDD Package. The FDD discloses a predecessor, Old Spice Traders, Inc. (OSTI), which was dissolved in 2008. The franchisor was formed in 2008 and appears to have a continuous operating history since then. Inadequate disclosure about predecessors can hide a history of business failures, litigation, or other problems that might be relevant to your investment decision.

Potential Mitigations

• Your attorney should carefully review all disclosures related to a franchisor's predecessor entities.
• It is beneficial to conduct independent research on the business history and reputation of any predecessor companies with a business advisor.
• You can ask long-tenured franchisees about their experience under any previous ownership or brand names.

Explanation

This risk was not identified in the FDD Package. Item 3 states, 'No litigation is required to be disclosed in this Item.' A pattern of lawsuits filed by franchisees alleging fraud, misrepresentation, or breach of contract is a significant red flag. Similarly, a high volume of litigation initiated by the franchisor against its franchisees can indicate an overly aggressive or problematic relationship.

Potential Mitigations

• A franchise attorney should always be engaged to carefully review any disclosed litigation in Item 3.
• Even if no litigation is disclosed, performing a public records search for litigation involving the franchisor can be a prudent step for your attorney.
• Asking current and former franchisees about their experiences with disputes is a critical part of due diligence.