Explanation

This risk was not identified in the FDD package. Rapid, uncontrolled growth can strain a franchisor's ability to provide adequate support to its franchisees. A system that expands faster than its support infrastructure may lead to issues with training, site selection, and ongoing assistance, potentially harming franchisee operations and profitability. Monitoring growth rates in Item 20 is important.

Potential Mitigations

• An analysis of the franchisor's growth trajectory in Item 20 with your business advisor can help assess if support systems are likely to be strained.
• Inquiring with existing franchisees about the quality and timeliness of franchisor support is a prudent step your attorney can guide you through.
• Your accountant should review the franchisor's financial statements to determine if they are investing sufficiently in support infrastructure to match growth.

Explanation

This risk was not identified in the FDD package. Investing in a new or unproven franchise system carries heightened risks, including a business model that has not been validated in diverse markets, underdeveloped operational systems, and a lack of brand recognition. The franchisor's management may also lack experience in providing franchisee support. Careful scrutiny of Items 1, 2, and 20 is necessary to evaluate the system's track record.

Potential Mitigations

• A thorough investigation into the professional backgrounds of the management team, with help from a business advisor, is crucial for any franchise.
• Your attorney can help you formulate questions for the very first franchisees in the system to understand their early experiences.
• An accountant's review of the franchisor's capitalization can reveal if it has the financial strength to support its initial growth phase.

Explanation

This risk was not identified in the FDD package. Inexperienced management can be a significant liability, as they may lack the specific skills to run a franchise system effectively, even if they are experts in the industry itself. This can result in weak support, poor strategic decisions, and inadequate training programs. Reviewing the executive biographies in Item 2 is a key step in assessing this risk.

Potential Mitigations

• Your business advisor can help you evaluate the management team's experience outlined in Item 2, focusing on both industry and franchise-specific expertise.
• Speaking with current franchisees about the quality and competence of the management team is a critical due diligence step.
• An attorney can help you understand if the franchisor's obligations in the agreement are specific enough to hold them accountable regardless of their experience level.

Explanation

This risk was not identified in the FDD package. Private equity ownership can introduce a focus on short-term profitability that may not align with the long-term health of franchisees. This can sometimes lead to reduced support, increased fees, or pressure to cut costs. Item 1 of the FDD, which details the franchisor's corporate structure, is the primary source for identifying this ownership structure.

Potential Mitigations

• Researching the track record of any involved private equity firm with other franchise brands can provide valuable insight; a business advisor can assist with this.
• Your attorney should carefully review any clauses in the Franchise Agreement that permit the franchisor to sell or assign the system.
• Discussing any changes since a private equity acquisition with existing franchisees can reveal shifts in the franchisor's priorities.

Explanation

This risk was not identified in the FDD package. If a franchisor is a subsidiary of another company, the financial health and stability of that parent company can be critical. The FTC Rule may require the parent's financial statements to be disclosed in Item 21, especially if the parent guarantees the franchisor's performance or is a key supplier. Failure to disclose a parent or its financials when required can obscure significant risks.

Potential Mitigations

• Your attorney can help investigate the franchisor's corporate structure to identify any parent or controlling entities.
• If a parent company exists, it is important to have your accountant review its financial statements for signs of strength or weakness.
• Understanding any guarantees or support provided by the parent company requires careful review of the FDD and Franchise Agreement with your legal counsel.

Explanation

This risk was not identified in the FDD package. Item 1 explicitly states that the franchisor has no predecessors. A predecessor is a company from which the franchisor acquired the major portion of its assets. When predecessors exist, it's important to investigate their history for any signs of trouble, such as litigation or bankruptcy, as these could reflect on the current system's stability.

Potential Mitigations

• Confirming the absence of predecessors in Item 1 is a straightforward due diligence check your attorney can perform.
• A business advisor can help you research the franchisor's history to ensure no entities that function as predecessors have been omitted.
• You should always ask existing franchisees about the history of the system and any previous ownership structures.

Explanation

This risk was not identified in the FDD package. According to Item 3, True REST does not have any material litigation that requires disclosure. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag indicating systemic problems. The absence of such litigation is a positive sign, but does not eliminate all business risks.

Potential Mitigations

• Your attorney should confirm the 'no litigation' disclosure in Item 3 and can conduct independent searches for litigation not required to be disclosed.
• It is always advisable to ask current and former franchisees about any disputes they may have had with the franchisor, even if not formal lawsuits.
• Maintaining open communication and documenting all significant interactions with the franchisor can be a valuable practice, as advised by legal counsel.