Explanation

Item 20 data reveals a very high rate of turnover. In FY24, the traditional franchisee count dropped by 18 units, a 16% decline from the start of the year. Over three years, the system has seen a net loss of 50 traditional franchised units, a 35% reduction from the FY22 starting base. This level of unit decline is a significant indicator of potential systemic issues, which could include franchisee unprofitability, dissatisfaction, or other operational challenges.

Potential Mitigations

• Your attorney should advise you on the significance of this high turnover rate before you proceed.
• Contacting a broad sample of the former franchisees listed in Exhibit C is essential to understand why they left the system.
• A business advisor can help you assess if this trend poses a critical risk to the long-term viability of your potential investment.

Explanation

Item 3 discloses a significant pattern of litigation initiated by franchisees against the franchisor. Multiple concluded cases involved allegations of fraud, misrepresentation, unreasonable standards, and violations of state franchise acts. While some cases were dismissed or settled, the sheer number and the nature of the allegations from franchisees in the US and internationally indicate a highly contentious relationship between the franchisor and some of its operators, which is a major risk for a new franchisee.

Potential Mitigations

• Your franchise attorney must conduct a detailed review and explanation of every lawsuit disclosed in Item 3.
• This pattern of litigation should be a key topic of discussion when you interview current and former franchisees.
• A business advisor can help you assess how this litigious history might affect your own relationship with the franchisor.

Explanation

The franchisor explicitly discloses several key risks on page 4 of the FDD and in multiple state-specific addenda. These include requirements for out-of-state dispute resolution in Indiana, the application of Indiana law which may offer fewer protections than your local law, and a complex trademark ownership structure involving an affiliate. These disclosures confirm that these are known, material risks you are expected to acknowledge before investing.

Potential Mitigations

• Have your franchise attorney carefully review all 'Special Risks' and state-specific addenda to explain their full impact on your rights.
• A business advisor can help you assess the operational risks associated with these franchisor warnings.
• Discuss these disclosed risks directly with the franchisor and ask how they suggest you should manage them.

Explanation

The Financial Performance Representation in Item 19 is complex and potentially misleading. The primary profit-and-loss-style analysis (Table B) is based on data from 'Franchise Partners,' which is a different, low-investment franchise model, not the traditional model being offered. The data is then 'modified' to project what a traditional franchisee might experience. Using data from a different economic model to represent the potential of the one you are buying presents a significant risk of misunderstanding.

Potential Mitigations

• Your accountant must carefully dissect the Item 19 disclosures, noting that the profit data comes from a different business model.
• It is crucial to develop your own financial projections based on discussions with *traditional* franchisees, not this modified FPR.
• Your attorney should advise you on the legal risks of relying on an FPR based on a different franchise concept.

Explanation

The FPR in Item 19 is based on a selected subset of outlets. It explicitly excludes 34 of 93 traditional franchise restaurants (37% of the cohort) and 18 of 173 Franchise Partner restaurants from its analysis. The reasons cited include not being in operation for a sufficient period or being in non-traditional venues. Excluding such a large percentage of the system from the performance data makes the representation highly selective and likely unrepresentative of the system as a whole.

Potential Mitigations

• Your accountant must highlight the high percentage of excluded units and the potential for the presented data to be skewed high.
• Ask the franchisor for the performance data of the excluded restaurants, though they are not obligated to provide it.
• A business advisor can help you understand that these results may only reflect more successful or established locations.

Explanation

The 'Modified Performance Results' table in Item 19, Part B, omits several critical expenses. Footnote 9 explicitly states that rent/occupancy costs, financing costs, property taxes, insurance, depreciation, and organizational/administrative expenses are all excluded. Without these major operating costs, the 'Restaurant Profit' figure of 20.6% is not a true reflection of net profit and could be highly misleading for estimating your actual potential return on investment.

Potential Mitigations

• Your accountant must create a pro-forma financial statement, adding in realistic local estimates for all the excluded costs.
• It is essential to understand that the 'Restaurant Profit' shown is not your take-home pay; many significant costs are omitted.
• A financial advisor can help you project a more realistic net profit after accounting for all business expenses.

Explanation

This risk is present in a unique way. The FPR's sales data (Table A) mixes results from 'Traditional Franchise Restaurants' with 'Franchise Partner Restaurants,' which the FDD states have different economic terms. More significantly, the detailed expense and profit analysis (Table B) is based *only* on the Franchise Partner model and then 'modified' to project results for the Traditional model. This mixing and modification of data from different business structures is a significant risk for misinterpretation.

Potential Mitigations

• Your accountant must carefully distinguish between the two models and understand that the profit data is not directly from traditional franchisees.
• Focus your own due diligence on speaking with franchisees of the *traditional* model to understand their actual costs and profitability.
• Your attorney should advise you on the risks of relying on an FPR that is not based on the actual performance of the model being offered.

Explanation

The FPR in Item 19 explicitly excludes a substantial number of outlets. Footnote 1 states that 34 of the 93 Traditional Franchise Restaurants were excluded. Footnote 2 states that 18 of the 173 Franchise Partner Restaurants were excluded. The primary reason given is not meeting the minimum time in operation. Excluding such a large portion of the system means the FPR is not representative of all outlets and likely omits newer or potentially less successful locations.

Potential Mitigations

• Your accountant must consider the impact of excluding nearly 37% of traditional restaurants from the data set.
• It is critical to ask the franchisor for the performance data of the excluded group, although they are not required to provide it.
• A business advisor can help you assess the risk that the presented data is skewed by survivorship bias.

Explanation

Material facts that could be considered obscured include the complex trademark licensing structure requiring a separate agreement with an affiliate, and the use of data from a different franchise model ('Franchise Partners') as the basis for the Item 19 FPR. While disclosed, the full implications of these structural complexities and the unrepresentative nature of the FPR may not be immediately apparent, creating a risk of misunderstanding the franchise offering and its potential performance.

Potential Mitigations

• Your attorney must review every agreement and exhibit to map out the full legal and operational structure, not just the FDD summary.
• It is crucial to have an accountant analyze the basis for the Item 19 data to avoid being misled by the numbers.
• A business advisor can help you formulate detailed questions for the franchisor to clarify these complex areas.

Explanation

The data in Item 20 shows a significant net loss of traditional franchised units over the last three years (from 143 to 93). In FY24 alone, 18 units closed, representing a 16% decline. The data also shows a high number of 'Ceased Operations-Other Reasons' for the Franchise Partner model (18 in FY24). This extremely high churn rate across the system is a critical indicator of potential systemic problems, franchisee dissatisfaction, or lack of profitability.

Potential Mitigations

• Your accountant should perform a detailed analysis of the turnover rates in Item 20 for all franchise types.
• It is imperative that you contact a significant number of the former franchisees listed in Exhibit C to understand their reasons for leaving.
• Your attorney must advise you on the severe risks associated with investing in a system with such high franchisee turnover.

Explanation

You are required to pay an ongoing Royalty and System Fee of 5% of Gross Receipts. These fees are due weekly and must be paid even if your restaurant is not profitable. The Franchise Agreement also notes that upon renewal, you will be required to sign the then-current agreement, which could have higher fees. This continuous payment obligation, regardless of profitability, is a significant financial burden and risk.

Potential Mitigations

• Your accountant must factor the 5% royalty into all financial projections to accurately forecast potential profitability and cash flow.
• Understand that the franchisor has no obligation to reduce or waive fees during periods of poor performance.
• Your attorney should review the renewal terms to assess the risk of future fee increases.

Explanation

Beyond the 5% royalty, Item 6 details a multitude of other fees. These include a 1% Digital and Production Fund Fee, fees for operating assistance ($4,000/month plus expenses), additional manager training ($3,000), audit costs, late fees (18%), and technology fees for software, surveillance, and help desk support that can total over $6,000 annually. The sheer number and potential magnitude of these fees can significantly increase your ongoing operational costs beyond the headline royalty rate.

Potential Mitigations

• Your accountant must create a comprehensive budget that includes all of the potential fees listed in Item 6.
• It is essential to ask current franchisees about the actual 'all-in' cost of fees they pay to the franchisor.
• Your attorney should review the franchisor's right to introduce new fees or increase existing ones.

Explanation

The Franchise Agreement requires you to perform remodels and other upgrades to meet then-current system standards. These alterations can be required as frequently as every five years, or even sooner for certain types of changes. The agreement does not place a cap on the potential cost of these mandatory expenditures, creating a risk of significant, unpredictable financial burdens throughout the term of your agreement and as a condition of renewal.

Potential Mitigations

• Your accountant must help you create a capital reserve fund specifically for future, mandatory remodels and upgrades.
• Discuss the frequency and cost of past required renovations with existing franchisees to better anticipate future expenses.
• Your attorney should review the remodeling clauses to understand the full scope of your obligations and the franchisor's discretion.

Explanation

The initial investment for a freestanding restaurant ranges up to nearly $2.7 million. A critical footnote in Item 7 reveals that for the 'Freestanding Quick-Service Format,' there are currently no operating examples, and the cost figures are merely estimates from design professionals, not based on actual construction costs. This lack of real-world data creates a very high risk that your actual investment could significantly exceed the estimate, potentially leading to undercapitalization and business failure.

Potential Mitigations

• Your accountant must treat the Item 7 estimates with extreme caution and develop an independent budget based on local contractor and supplier quotes.
• Secure a significant contingency fund, well above the 'Additional Funds' line item, to cover potential cost overruns.
• A real estate professional and a construction advisor are crucial for validating costs in your specific market.

Explanation

A material inconsistency exists within the FDD package. Item 19's detailed profit and loss statement is based on the 'Franchise Partner' model, which has different economics from the 'Traditional Franchise' model you are being offered. This creates a disconnect between the financial data presented and the actual opportunity, posing a significant risk of confusion and flawed financial analysis. Relying on this data could lead to inaccurate business planning and unmet expectations.

Potential Mitigations

• Your accountant must highlight this inconsistency and advise you not to rely on the Item 19 profit data for your projections.
• It is essential that your business plan is based on due diligence with actual *traditional* franchisees, not the provided FPR.
• Your attorney should advise on the legal implications of a franchisor providing an FPR from a different business model.

Explanation

The Franchise Agreement contains a strong integration clause in Section 16.9, stating it represents the entire agreement. Furthermore, the franchisor requires you to sign an 'Eyes Wide Open Compliance Certification' (Exhibit L), where you must affirm that you did not rely on any statements or promises made outside of the FDD. These clauses are designed to prevent you from making legal claims based on any verbal promises from sales staff, creating a significant risk.

Potential Mitigations

• Your attorney will advise that any promise or representation that is important to your decision must be included in writing as an addendum to the Franchise Agreement.
• Do not sign the compliance certification if any of its statements are untrue. Discuss any discrepancies with your attorney.
• Keep detailed written records of all communications with the franchisor, but understand they may not be legally enforceable.

Explanation

This risk is present. Franchise agreements are adhesion contracts drafted by the franchisor to be favorable to them. Steak n Shake reinforces this by requiring you to sign the 'Eyes Wide Open Compliance Certification,' a questionnaire designed to confirm you understand and agree to numerous one-sided terms. This signals that the franchisor expects adherence to their terms and may not be open to significant negotiation.

Potential Mitigations

• You must engage an experienced franchise attorney to review all documents and identify the most critical risks.
• While major changes are unlikely, your attorney may be able to negotiate minor concessions or clarifications.
• The primary mitigation is to fully understand all your obligations and risks before you commit to the investment.

Explanation

Section 15.9 of the Franchise Agreement contractually shortens the time you have to bring a claim against the franchisor to just one year from the event. This is significantly shorter than the multi-year statutes of limitation typically provided by state law for contract or fraud claims. This provision creates a high risk that you could forfeit valid legal claims if you do not act almost immediately upon discovering a problem.

Potential Mitigations

• Your attorney must advise you of this shortened period and its severe implications for your legal rights.
• It is critical to seek legal counsel immediately if you believe you have a claim against the franchisor.
• Your attorney should check if this provision is enforceable under your state's franchise laws, as some states prohibit it.

Explanation

The Franchise Agreement requires that all legal actions be filed in the State of Indiana. This is also highlighted as a 'Special Risk' on page 4 of the FDD. For a franchisee operating in a different state, this is a significant disadvantage, requiring you to hire local Indiana counsel and travel for court proceedings, which adds considerable cost and complexity to resolving any dispute. This gives the franchisor a strong 'home court' advantage.

Potential Mitigations

• Your attorney should determine if your state's franchise laws override this forum selection clause.
• Factor the potential cost of out-of-state litigation into your risk assessment with your accountant and attorney.
• Attempt to negotiate for dispute resolution in a neutral location, though this is rarely successful.

Explanation

The Franchise Agreement, in Section 15.4, mandates that the laws of Indiana govern the contract. Indiana law may not have the same franchisee-protective statutes (e.g., regarding termination, non-renewal, or non-compete clauses) as your home state. This choice of law could put you at a legal disadvantage in a dispute, as you would not be able to rely on potentially more favorable local laws.

Potential Mitigations

• Your franchise attorney must be knowledgeable about or research Indiana franchise law to advise you on your rights.
• Determine if your home state has franchise relationship laws that cannot be waived by a choice-of-law clause.
• Fully understand how key provisions like termination and non-competes are interpreted under Indiana law.

Explanation

Item 12 states bluntly, 'You will not receive an exclusive territory.' While the franchisor may grant a 'Protected Area,' they reserve extensive rights to operate or franchise competing outlets in 'Captive Facilities' (airports, universities, etc.) within that area. They also reserve the right to sell products through any alternative channel, such as grocery stores or online. This lack of meaningful exclusivity creates a high risk of the franchisor or other franchisees competing directly with you.

Potential Mitigations

• A business advisor and real estate professional must help you assess the viability of a location given the lack of territorial protection.
• Your attorney should seek to clearly define the 'Protected Area' and negotiate for a right of first refusal on any new developments nearby.
• Understand that your primary protection from competition is your location and operational excellence, not the contract.

Explanation

The concept of a 'Protected Area' is offered, but its value is diminished by ambiguity and exceptions. The size is discretionary ('typically... a radius of two-miles'), and it is completely negated for 'Captive Facilities' like universities or travel centers, which are broadly defined. This means your 'protected' territory is not truly protected from competition from other Steak n Shake branded outlets operating in these numerous types of special venues.

Potential Mitigations

• Your attorney must help you understand all the exceptions that weaken your territorial protection.
• A real estate professional should map out all potential 'Captive Facility' locations within your proposed territory to assess future competition risk.
• Attempt to negotiate with the franchisor for a more clearly defined and less exception-filled territory.

Explanation

The franchisor explicitly reserves the right to sell branded products (such as canned chili) through alternative channels like grocery stores, the internet, or any other method, both inside and outside your Protected Area. You will not receive any compensation for these sales. This creates direct competition for product sales and could dilute the value of your restaurant as the sole local source for the brand's products.

Potential Mitigations

• A business advisor can help you assess the potential impact of these alternative channel sales on your business model.
• Your attorney can inquire about any revenue-sharing possibilities, though the agreement explicitly denies them.
• Focus your marketing on the in-restaurant experience that cannot be replicated through these other channels.

Explanation

You and all other principal owners (holding 10% or more) are required to sign an unlimited personal guaranty (Appendix B-1). This makes you personally liable for all debts and obligations of the franchise, including future royalties and other fees in case of termination. This means your personal assets, such as your home and savings, are at risk to satisfy business debts, bypassing the protection of your corporate entity.

Potential Mitigations

• Your attorney must explain the full extent of the liabilities you are personally assuming with this guaranty.
• It is wise to discuss asset protection strategies with a financial advisor and your attorney.
• Ask your attorney if it's possible to negotiate a cap on the guaranty amount, though this is often difficult.

Explanation

The Personal Guaranty you must sign does not automatically terminate when you sell or transfer the franchise. It remains in effect unless the franchisor, in its sole discretion and in writing, agrees to release you. This creates a significant long-term risk where you could remain personally liable for the defaults of a future owner of your former business.

Potential Mitigations

• Your attorney must make obtaining a written release from the personal guaranty a non-negotiable condition of any future sale of the business.
• When selling, ensure the buyer is highly qualified and provides their own acceptable guaranty to the franchisor to facilitate your release.
• Understand that without a written release, your personal assets remain at risk even after you have sold the business.

Explanation

The Franchise Agreement contains a very broad, one-sided indemnification clause. You are required to indemnify the franchisor for nearly all claims arising from the restaurant's operation, including those resulting from your compliance with the franchisor's mandated standards. The franchisor, however, does not provide a reciprocal indemnification to you, except potentially for trademark infringement (covered in the License Agreement), creating a significant imbalance of liability.

Potential Mitigations

• Your attorney should explain the vast scope of the financial liabilities you are accepting with this clause.
• Consult your insurance broker to ensure your general liability insurance policy is sufficient to cover these extensive indemnification obligations.
• Ask your attorney to negotiate for a mutual indemnification clause or to at least exclude claims arising from the franchisor's own negligence.

Explanation

The franchisor requires you and all principal owners to sign an 'Eyes Wide Open Compliance Certification' (Exhibit L). This multi-page questionnaire forces you to affirm that you understand and agree to numerous one-sided contract terms and that you did not rely on any information outside the FDD. This is a powerful tool the franchisor can use to defend against future claims of fraud or misrepresentation, making it harder for you to hold them accountable for verbal promises.

Potential Mitigations

• You must answer every question in this document truthfully. If a statement is not true, do not sign it without consulting your attorney.
• Your attorney should advise you that signing this document can significantly weaken your ability to make certain legal claims later.
• If any verbal promises are important to your decision, insist they be added in writing to the Franchise Agreement before you sign this certification.

Explanation

This risk is present. Item 20 discloses, 'In some instances, current and former franchisees signed provisions restricting their ability to speak openly about their experience with Steak n Shake By Biglari.' This is an explicit admission that confidentiality clauses are used, which may prevent you from getting a complete and honest picture of the system's health and franchisee satisfaction during your due diligence calls.

Potential Mitigations

• A business advisor can help you recognize that information from your due diligence calls may be incomplete due to these restrictions.
• It is essential to speak with a larger and more diverse group of franchisees to get a more balanced view.
• Your attorney should be aware of this disclosure, as it highlights a potential information asymmetry in your investigation.

Explanation

The Franchise Agreement is replete with clauses granting the franchisor 'sole discretion' in making decisions that affect you. For example, Section 16.4 states the franchisor can make decisions based on its judgment of what is in its own best interests. This extensive use of discretionary language means many of the franchisor's purported obligations for support and approvals are not firm commitments, creating uncertainty and a significant power imbalance in the relationship.

Potential Mitigations

• Your attorney should identify all instances of 'sole discretion' and attempt to negotiate for a 'reasonableness' standard.
• It's crucial to understand that under the contract, the franchisor may not be obligated to act in your best interest.
• Speak with current franchisees about how the franchisor exercises its discretion in practice.

Explanation

Item 11 begins with the disclaimer 'Except as listed below, we are not required to provide you with any assistance.' While it then lists pre-opening and ongoing support, the framing suggests a minimalistic approach. The franchisor's obligations are limited to what is explicitly stated, and any additional support may come with extra fees. Given the system's high turnover, there is a risk that the contractually obligated level of support is insufficient for franchisee success.

Potential Mitigations

• It is critical to speak with a large number of current franchisees to gauge the actual quality, timeliness, and sufficiency of franchisor support.
• Your attorney should seek to clarify and strengthen the franchisor's support obligations in the Franchise Agreement.
• A business advisor can help you assess whether you will need to budget for additional outside consulting and support.

Explanation

The Franchise Agreement gives the franchisor the unilateral right to change virtually all system standards at any time through modifications to the Operations Manual. You are required to comply with these changes at your own expense. This could include costly remodels, new technology adoption, or changes to approved products and services, creating unpredictable expenses and operational shifts that you must adhere to.

Potential Mitigations

• Your accountant must help you budget a significant contingency fund for ongoing, mandatory system changes.
• A business advisor can help you assess the potential impact of these changes by talking to existing franchisees about past requirements.
• Your attorney should try to negotiate for caps on required capital outlays or longer implementation timelines for major changes.

Explanation

The Franchise Agreement explicitly states that you must bear the full cost of any system changes the franchisor mandates, such as remodels or technology upgrades. These changes, while potentially beneficial for the brand as a whole, may not provide a positive return on investment for your specific location. You have no right to refuse these changes and must pay for them yourself, which could significantly harm your profitability.

Potential Mitigations

• It is critical to discuss the history and cost of mandated changes with current franchisees.
• Your accountant should model the potential impact of unbudgeted capital expenditures on your cash flow and profitability.
• Your attorney can advise you on the limited recourse you have if a required change is economically detrimental to your business.

Explanation

Item 8 states an estimated 95% of all your purchases will be from designated or approved suppliers. The franchisor has sole discretion to approve suppliers and is not required to disclose its criteria. The franchisor also explicitly states that it receives rebates from suppliers ($535,904 in FY24) and is not obligated to share them with you. This creates a high risk of being locked into paying non-competitive prices, which directly benefits the franchisor at your expense.

Potential Mitigations

• Your accountant should research market prices for comparable goods to assess the pricing from mandated suppliers.
• It is important to discuss supplier costs and quality with existing franchisees.
• Your attorney should review the supplier approval process and try to negotiate for more objective standards.

Explanation

The Franchise Agreement gives the franchisor sole discretion to approve or deny any alternative suppliers you propose. A request is deemed denied if the franchisor does not respond within 30 days. The agreement also notes that the franchisor is 'likely to reject' a request if they already have a designated supplier. This effectively prevents you from seeking lower-cost alternatives for supplies, locking you into the franchisor's designated supply chain.

Potential Mitigations

• Your business advisor should help you understand that cost control through sourcing will be very limited in this system.
• Focus due diligence questions to current franchisees on the price and quality of goods from the required suppliers.
• Your attorney could attempt to negotiate for a 'reasonableness' standard for supplier approval, but this is unlikely to succeed given the explicit language.

Explanation

If you lease your location, you must attach the franchisor's Lease Addendum (Appendix C) to your lease. This addendum gives the franchisor significant control, including the right to cure your defaults with the landlord and, most importantly, the right to take over your lease if your Franchise Agreement is terminated. This could leave you with personal liability on a lease for a business you no longer own, creating a severe financial risk.

Potential Mitigations

• Your real estate attorney must review the Lease Addendum and explain its full implications before you sign any lease.
• Attempt to negotiate with your landlord to be released from personal liability on the lease if the franchisor exercises its option to assume it.
• Understand that a default under your lease can also trigger a default of your Franchise Agreement.

Explanation

You are required to purchase and use the specific point-of-sale (POS) systems, surveillance cameras, and other technologies mandated by the franchisor. You must pay all associated initial and ongoing costs, including software licenses, maintenance contracts, and mandatory upgrades. Item 6 lists annual technology fees of over $6,000, and Item 11 notes the initial surveillance system charge is $9,000. These locked-in costs can be significant and non-negotiable.

Potential Mitigations

• Your accountant must include all specified technology fees and potential upgrade costs in your financial projections.
• Discuss the reliability, functionality, and cost of the required technology with current franchisees.
• Your attorney should review the technology agreements to understand your obligations and the franchisor's right to mandate future changes.

Explanation

If your agreement is terminated for cause, you are liable for 'Lost Revenue Damages.' This is calculated as the net present value of royalties for up to the next five years, based on your historical sales. This clause creates a potentially massive, lump-sum financial liability that could be financially devastating, far exceeding any actual damages suffered by the franchisor, especially if your business was already struggling.

Potential Mitigations

• Your attorney must explain the severe financial consequences of this liquidated damages clause.
• It is crucial for your accountant to model this potential liability so you fully understand the financial risk of termination.
• Your attorney should check the enforceability of such liquidated damages clauses under Indiana law, as they can sometimes be deemed unenforceable penalties.

Explanation

After termination or transfer, you and your principal owners are prohibited from having any interest in a competing business for two years. This restriction applies to a broad radius of five miles from your former location *or any other existing Steak n Shake restaurant*. This geographically vast restriction could severely limit your ability to work in the restaurant industry in many parts of the country after leaving the system.

Potential Mitigations

• Your attorney must advise you on the enforceability of such a broad non-compete clause under applicable state law.
• Attempt to negotiate with your attorney to limit the non-compete's geographic scope to only the area around your former restaurant.
• A business advisor can help you plan for alternative career paths should you exit the franchise.

Explanation

Article 11 of the Franchise Agreement provides a lengthy and detailed list of franchisee defaults that can lead to termination. Many of these are 'non-curable,' meaning the franchisor can terminate your agreement immediately without giving you a chance to fix the problem. Even a minor, unintentional violation of the complex agreement or the 700+ page manual could theoretically lead to the complete loss of your investment and business.

Potential Mitigations

• You must engage an experienced franchise attorney to review every single default provision so you fully understand your risks.
• Implementing a rigorous compliance program with your management team is essential to avoid default.
• Maintain open and documented communication with the franchisor to address any potential compliance issues proactively.

Explanation

The risk of cross-default is explicitly present. Section 11.1(A)(xiv) of the Franchise Agreement states that if the separate License Agreement is terminated, it constitutes an immediate, non-curable default of the Franchise Agreement. This means a dispute with the franchisor's affiliate (the Licensor) could lead to the termination of your core franchise rights, creating a significant structural risk where a problem in one agreement can topple the entire relationship.

Potential Mitigations

• Your attorney must advise you on the severe implications of this cross-default provision.
• It is critical to maintain perfect compliance with the License Agreement, including timely payment of the 1% License Fee.
• In any dispute, be aware that the franchisor holds this powerful leverage to terminate the main agreement.

Explanation

The Franchise Agreement lists numerous defaults that are non-curable, meaning you have zero opportunity to fix the issue before termination. For example, knowingly using a non-designated menu or having a report understate Gross Receipts by more than 2% allows for immediate termination. Even for curable defaults, the cure period is typically 30 days. This 'hair-trigger' termination structure creates a very precarious operating environment for the franchisee.

Potential Mitigations

• Meticulous operational and financial management is absolutely essential to avoid triggering a non-curable default.
• Your attorney must review your state's franchise relationship laws, which may require 'good cause' and an opportunity to cure, potentially overriding these harsh terms.
• Implementing robust internal controls with the help of your accountant can help prevent unintentional defaults.

Explanation

This risk is present. The Franchise Agreement provides very limited rights for you to terminate. Section 11.1(C) allows you to terminate only if the franchisor materially breaches the agreement and then fails to cure that breach. The franchisor, in contrast, has dozens of specific grounds for termination, many of which are non-curable. This significant imbalance of power and remedies is a major risk.

Potential Mitigations

• Your attorney must explain the one-sided nature of the termination rights in the agreement.
• It is crucial to meticulously document any instance of franchisor non-performance if you ever hope to build a case for termination.
• Understand that exiting the agreement, even with cause, will be a difficult and potentially costly legal process.

Explanation

This risk is present. Upon termination, Section 11.3 gives the franchisor the option to purchase your restaurant assets at 'fair market value.' However, the clause explicitly states there shall be 'no allowance for goodwill.' This means you will not be compensated for the value you have built as a going concern. The valuation will be based only on the physical assets, potentially resulting in you losing a significant portion of your business's equity.

Potential Mitigations

• Your attorney should attempt to negotiate for the inclusion of goodwill in the purchase price calculation.
• It's important for your accountant to understand that the exit value of your business may be contractually limited in a termination scenario.
• Focus on avoiding termination by maintaining strict compliance with the agreement, as this is the best way to protect your equity.

Explanation

Section 5.6 of the Franchise Agreement gives the franchisor the right, though not the obligation, to take over and manage your restaurant if you are in default. If they do, you are required to pay them a management fee on top of all other fees and reimburse them for any operating losses they incur. This allows the franchisor to seize control of your asset while you remain financially responsible, creating a significant risk.

Potential Mitigations

• The best mitigation is to avoid default; your attorney must explain all default triggers in the agreement.
• Your attorney should review the takeover clause to understand your rights and liabilities during such a period.
• Maintain adequate working capital with the help of your accountant to prevent financial defaults that could trigger this clause.

Explanation

To renew your franchise, you must meet several difficult conditions. These include signing the then-current Franchise Agreement (which may have higher fees and fewer rights), paying a renewal fee of 50% of the then-current initial fee, completing any required remodeling at your own expense, and signing a general release of all legal claims against the franchisor. These hurdles create significant uncertainty and potential expense, making long-term planning difficult.

Potential Mitigations

• Your attorney must review the renewal requirements so you understand the long-term costs and conditions from day one.
• Your accountant should help you budget for the eventual renewal fee and remodeling costs.
• Ask your attorney to negotiate for more favorable renewal terms, such as a cap on the renewal fee or the right to renew on existing terms.

Explanation

If you sell your business, the buyer is required to sign the franchisor's then-current Franchise Agreement, which may have materially less favorable terms (e.g., higher royalty fees, fewer protections) than your current agreement. This can significantly reduce the attractiveness of your business to potential buyers and lower its market value, as a buyer's projections will be based on the more expensive, new agreement.

Potential Mitigations

• Your financial advisor must account for this when creating any long-term valuation or exit strategy for your business.
• When negotiating with a buyer, be transparent about this requirement with guidance from your attorney or business broker.
• Your attorney could attempt to negotiate the right for a qualified buyer to assume your existing agreement, though this is rarely granted.

Explanation

The Franchise Agreement gives the franchisor broad grounds to deny your request to sell (transfer) the business. These include subjective criteria, such as if the buyer doesn't meet the franchisor's 'educational, managerial and business standards' or if, in the franchisor's 'sole judgment,' the purchase price or financing terms are 'so burdensome' as to threaten the business. This subjectivity gives the franchisor significant power to block a sale.

Potential Mitigations

• Your attorney should try to negotiate for more objective and reasonable standards for approving a transfer.
• It is wise to pre-qualify potential buyers with the franchisor before entering into a formal sale agreement.
• A business broker experienced in franchising can help find qualified buyers who are more likely to be approved.

Explanation

A significant structural risk exists because your right to operate and your right to use the brand's trademarks are granted by two different companies through two separate contracts. You sign a Franchise Agreement with Steak n Shake Enterprises, Inc., but a License Agreement with an affiliate, Steak n Shake, LLC. A default under one agreement can trigger a default under the other, complicating your legal relationship and potentially creating conflicts between the two entities.

Potential Mitigations

• Your attorney must review both the Franchise Agreement and the License Agreement to understand the interconnected rights and obligations.
• It is crucial to understand that you have binding legal duties to two separate but affiliated entities.
• In case of any dispute, legal counsel must be engaged to navigate the complexities of this bifurcated contractual structure.

Explanation

The FDD's financial performance data is unusually complex and potentially misleading. A significant portion of the analysis in Item 19 is based not on the traditional franchise model you are buying, but on a different, low-investment 'Franchise Partner' model. The franchisor then applies pro-forma adjustments to this data to estimate what a traditional franchisee might earn. This reliance on data from a separate economic model creates a substantial risk of misunderstanding the franchise's true financial potential.

Potential Mitigations

• Your accountant must carefully dissect the Item 19 disclosure and should advise you to treat the 'Modified' profit data with extreme skepticism.
• You must base your own financial projections on due diligence with actual *traditional* franchisees, not on the provided FPR.
• Your attorney should advise you on the high legal and financial risks of making an investment decision based on this type of convoluted FPR.