Explanation

The franchisor, TPTEA USA Inc. (TPTEA), appears to be in strong financial condition. Audited financial statements show consistent profitability, positive and growing net worth, and positive cash flow from operations for the past three fiscal years. No signs of financial instability like a going concern note were identified, which suggests the company has the resources to support its obligations. This is a positive finding, reducing the typical risk in this area.

Potential Mitigations

• Your accountant should still perform a full review of the financial statements in Exhibit A, including all notes, to confirm this assessment.
• A business advisor can help you understand the related-party transactions with the parent company in Taiwan and their potential impact.
• It is prudent to have your attorney review any financial performance representations and their relationship to the franchisor’s financial health.

Explanation

The risk of high franchisee turnover was not identified. Item 20 data for the past three years shows steady growth in the number of franchised outlets with zero terminations, non-renewals, or franchises that ceased operation for other reasons. This low turnover rate is a positive indicator and suggests that existing franchisees may be satisfied with the system and its performance, which reduces the risk of systemic problems.

Potential Mitigations

• Speaking with a range of current franchisees from the list in Item 20 is still a crucial step to confirm satisfaction and validate the data.
• Your business advisor can help you frame questions for franchisees about their experience and profitability.
• Continue to monitor future FDDs if you proceed, as your accountant would advise, to see if this positive trend continues.

Explanation

Item 20 indicates the system has grown from 6 to 16 franchised units over three years. While this is a fast percentage growth, the absolute number is still small. The franchisor's financial statements in Item 21 appear strong and capable of supporting this growth. The reliance on the experienced parent company in Taiwan for training and support may mitigate some risks associated with rapid expansion of a newer US-based entity.

Potential Mitigations

• In your discussions with existing franchisees, asking about the quality and timeliness of franchisor support is very important.
• A thorough review of the franchisor's support obligations in Item 11 with your attorney will clarify their commitments.
• Your accountant can assess if the franchisor's investment in support infrastructure, as seen in the financials, is keeping pace with growth.

Explanation

This risk was not identified in the FDD. Item 2 shows that the key executives of TPTEA have extensive experience with the parent company, TPTEA Co., Ltd., in Taiwan, often for over a decade in roles directly related to operations, development, and management. This experience with the core brand and its systems, although primarily international, significantly mitigates the risk of inexperienced leadership and suggests a strong understanding of the business model.

Potential Mitigations

• It is still wise to verify the management team's reputation by speaking with current franchisees about their interactions and the quality of leadership.
• A business advisor can help you assess how well the management's international experience translates to the specific challenges of the US market.
• Your attorney can help confirm the roles and responsibilities of the management team as described.

Explanation

This specific risk was not identified in the FDD package. Item 1 indicates the franchisor is a subsidiary of a long-standing corporate parent, TPTEA Co., Ltd., not a private equity firm. This structure may suggest a focus on long-term brand growth rather than short-term financial returns typical of some private equity investments. The absence of PE ownership can be a positive factor for prospective franchisees concerned about stability and long-term objectives.

Potential Mitigations

• Your attorney should still verify the full ownership structure of the franchisor and its parent company to ensure no PE involvement exists.
• A business advisor can help you understand the strategic implications of being part of a corporate-owned system versus a PE-backed one.
• It is always prudent to ask the franchisor about any long-term plans for selling the company.

Explanation

This risk was not identified. The FDD's Item 1 clearly discloses that TPTEA is a subsidiary of TPTEA Co., Ltd. in Taiwan. The franchisor's financial statements in Item 21 are provided and audited. While the parent company's financials are not included, the franchisor entity itself appears to be adequately capitalized and profitable. There is no indication that parent company financials are required by rule and being withheld, so the disclosure appears appropriate for the structure presented.

Potential Mitigations

• An accountant should review the provided financials and the notes on related-party transactions to assess the US entity's reliance on its parent.
• Your attorney can help clarify the legal and financial relationship between the US franchisor and its Taiwanese parent.
• Discussions with a business advisor can help you evaluate the operational implications of this parent-subsidiary structure.

Explanation

This risk does not appear to be present. Item 1 states that the franchisor, TPTEA, does not have any predecessors within the last 10 years. The business was established in the US in 2018 as a subsidiary of the Taiwanese parent company, which has been operating since 2005. The lack of a predecessor means there is no hidden history of prior system failures, litigation, or bankruptcy under a different corporate name that you would need to investigate.

Potential Mitigations

• Confirming the corporate history with your franchise attorney is a good practice to ensure all related entities are understood.
• A business advisor can help you research the history of the parent company, TPTEA Co., Ltd., for a more complete picture of the brand's background.
• When speaking with franchisees, it can be useful to ask about their understanding of the company's history.

Explanation

This risk was not identified. Item 3 of the FDD states that there is no litigation required to be disclosed. This applies to actions against the franchisor, its predecessors, and its management. The absence of a pattern of litigation, particularly franchisee-initiated lawsuits alleging fraud or misrepresentation, is a significant positive factor. It suggests a potentially healthier franchisor-franchisee relationship and less controversy surrounding the company's practices.

Potential Mitigations

• Your attorney can still conduct an independent search of public records to see if any non-material litigation exists for additional context.
• Asking current and former franchisees about any disputes, even those not rising to the level of disclosed litigation, is a valuable due diligence step.
• A business advisor can help you assess the overall health of franchisee relations within the system.