Explanation

High franchisee turnover can be a major warning sign of systemic problems. The data presented in Item 20 of this FDD does not indicate an unusually high rate of franchise terminations, non-renewals, or other cessations of business. A stable and growing franchisee base is generally a positive indicator for a franchise system.

Potential Mitigations

• It is still a valuable practice to contact current and former franchisees from the list provided in Exhibit F to discuss their experiences.
• Your business advisor can help you formulate questions regarding profitability and satisfaction with the franchisor.
• Ensure you understand the typical reasons for franchisee exits in any system by speaking with your attorney.

Explanation

This risk involves investing in a business concept based on a short-lived trend. The core product of this franchise is coffee, which is a well-established consumer staple with long-term demand. Therefore, the business does not appear to be based on a fad. A prospective franchisee should still assess how the business model adapts to changing consumer tastes.

Potential Mitigations

• To gauge long-term viability, discuss with your business advisor how the franchisor plans to innovate and adapt its offerings over time.
• When speaking with current franchisees, ask about the sustainability of customer demand and repeat business.
• An accountant can help you model profitability based on stable, long-term demand rather than novelty appeal.

Explanation

This risk was not identified. The franchisor's Chief Executive Officer, Tony Lamb, has served as the CEO of the affiliate franchisor, Kona Ice, since 2008. This indicates significant experience in managing a large, mobile franchise system. Experienced management can be a crucial factor in providing effective support and strategic direction for franchisees.

Potential Mitigations

• It is still worthwhile to ask current franchisees about their direct experiences with the management team's accessibility and quality of support.
• A business advisor can help you assess the overall depth of the management team listed in Item 2.
• When meeting the management team, you could inquire with them about how their past experience is being applied to this new brand.

Explanation

This risk arises when a franchisor fails to disclose parent companies that may be material to your investment decision. This FDD appears to meet its obligation by listing several parent entities in Item 1. A prospective franchisee should understand this complex corporate structure, as the ultimate control and financial backing may reside with these parent companies rather than the direct franchisor.

Potential Mitigations

• Your attorney can help you understand the implications of the multi-layered parent company structure.
• It is advisable to have your accountant review the provided financials in light of this structure to assess the stability of the entity you are contracting with.
• You might ask the franchisor to clarify the roles and relationships between the various parent and affiliate companies.

Explanation

This FDD does not disclose any predecessor entities from which the franchisor acquired the business. This means the risks associated with an undisclosed or troubled history from a prior version of the franchise system are not present here. The evaluation of the franchisor's stability should therefore focus on its own operational history and financial statements as disclosed.

Potential Mitigations

• An attorney can confirm that the corporate history described in Item 1 does not suggest the existence of an undisclosed predecessor.
• Due diligence should focus on the current franchisor's track record since its inception, which your business advisor can help you investigate.
• Speaking with the earliest franchisees in the system is crucial for understanding its history from the beginning.

Explanation

MCC does not disclose any material litigation in Item 3 of the FDD. This is a positive sign, as a pattern of lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, can be a significant red flag about a franchise system's health and integrity.

Potential Mitigations

• An attorney can perform a public records search to verify that no other material litigation exists that should have been disclosed.
• Asking current and former franchisees about their experiences and whether they are aware of any disputes is a good due diligence step.
• Your business advisor can help you compare the lack of litigation with other franchise systems.