Explanation

The audited financial statements for TikkaShack, LLC (TikkaShack) show consistent profitability and positive members' equity from 2022 to 2024. No 'going concern' notes or other major red flags were identified. However, in 2024, initial franchise fees accounted for approximately 15% of total revenue, an increase from prior years, which may suggest a growing reliance on franchise sales for income. This is considered a low risk due to the overall positive financial picture.

Potential Mitigations

• Have an experienced franchise accountant review the franchisor's financial statements, including all footnotes and year-over-year trends.
• Your accountant should assess the franchisor's reliance on initial franchise fees versus ongoing royalties for its revenue.
• Discuss the company's financial health and growth strategy with your business advisor to gauge long-term stability.

Explanation

This risk was not identified in the FDD package. The franchisor, TikkaShack, LLC, has been franchising since 2015 and its management has industry experience dating back to 2004. An unproven system can present risks such as underdeveloped support, untested marketing, and potential instability. It is important to evaluate a franchisor's track record and experience before investing.

Potential Mitigations

• A thorough review of the management team’s background in both the specific industry and in franchising is a crucial step for your business advisor.
• When evaluating a newer system, speaking with the earliest franchisees gives important insight into the system’s evolution and support quality.
• Your accountant can help assess if a young franchisor is sufficiently capitalized to support its franchisees and grow the brand.

Explanation

This risk was not identified in the FDD package. The fast-casual Indian and Asian fusion restaurant concepts appear to be established, rather than being based on a short-term trend. A fad-based business carries the risk that consumer interest will decline, potentially harming your long-term investment, even while your contractual obligations continue.

Potential Mitigations

• Your business advisor can help you research long-term market trends and consumer demand for the specific products or services offered.
• It is wise to assess a business concept's resilience to economic shifts and its potential for adaptation beyond current trends.
• Evaluating the franchisor's stated plans for research and development can provide clues about its commitment to long-term market relevance.

Explanation

This risk was not identified in the FDD package. Item 2 indicates that the franchisor's key management has been involved with the company and its parent since 2015 and 2004, respectively, suggesting significant experience in the restaurant industry. Inexperienced leadership can pose risks, as they may lack the expertise to provide effective support, manage growth, or navigate industry challenges, potentially impacting your success.

Potential Mitigations

• It is always prudent to have your business advisor help you research the background and track record of the franchisor's key executives.
• Speaking with existing franchisees is a good way to gauge the effectiveness and responsiveness of the current management team.
• Your attorney can help you understand how the management's experience, or lack thereof, might impact the franchisor's contractual obligations.

Explanation

This risk was not identified in the FDD package; Item 1 does not indicate ownership by a private equity firm. When a PE firm owns a franchisor, there can be a focus on short-term returns, which may lead to cost-cutting on franchisee support, pressure to use specific vendors, or a quick resale of the system. These actions might prioritize investor profits over the long-term health of franchisees' businesses.

Potential Mitigations

• If considering a PE-owned franchise, your business advisor should research the firm's reputation and history with other franchise brands.
• Your attorney can review the franchise agreement for terms that allow the franchisor to easily sell the system without your consent.
• Speaking with franchisees who have been in the system before and after a PE acquisition can provide valuable insight.

Explanation

Item 1 discloses an affiliate, Masalawok Franchise L.P., that previously franchised the Masala Wok brand from 2004 to 2017. While this history is disclosed, you have no information about the performance, litigation history, or franchisee turnover of that predecessor system. This information could be relevant to understanding the management's long-term track record in franchising.

Potential Mitigations

• Your attorney should carefully review all disclosures related to predecessors and affiliates.
• It could be valuable to ask the franchisor for more details about the operational history of any predecessor entities.
• Consider conducting independent online research for news or franchisee discussions related to the predecessor entity with the help of your business advisor.

Explanation

This risk was not identified in the FDD package. Item 3 does not disclose any current or past litigation against the franchisor involving claims of fraud, misrepresentation, or franchise law violations. A pattern of such lawsuits can be a major red flag, suggesting systemic problems with the franchisor's sales process, operations, or franchisee relationships. It is crucial to review Item 3 carefully in any FDD.

Potential Mitigations

• Your attorney should always be engaged to thoroughly review Item 3 for any disclosed litigation.
• If litigation is disclosed, it is crucial for your attorney to analyze the nature of the claims and their outcomes.
• Independent online searches for news articles or franchisee complaints can sometimes provide additional context beyond the FDD disclosures.