Explanation

This risk was not identified in the FDD package. Rapid system growth can strain a franchisor's ability to provide adequate support to new and existing franchisees. If a brand expands too quickly, resources for training, site selection, and ongoing operational assistance can be spread too thin, potentially compromising the quality of the system and the success of individual units. The data in Item 20 does not suggest excessively rapid growth for this system.

Potential Mitigations

• A business advisor can help you assess if a franchisor's growth plans are sustainable and matched by an equivalent investment in support infrastructure.
• Speaking with both new and established franchisees can provide insight into whether the quality of franchisor support has remained consistent during growth periods.
• Your accountant should review the franchisor's financial statements to determine if they have the capital to support their projected expansion.

Explanation

This risk was not identified in the FDD package. An unproven franchise system presents higher risks because its business model, brand recognition, and operational support have not withstood the test of time. According to Item 1, the predecessor began franchising in 2014, indicating the system has over a decade of operational history. Therefore, it is not considered a new or unproven system.

Potential Mitigations

• When considering a newer system, it is wise to have your business advisor conduct extensive due diligence on the founders' industry and franchising experience.
• You should ask an accountant to assess the capitalization of an emerging franchisor to ensure they can fund their initial support obligations.
• An attorney can help you negotiate more favorable terms, such as lower fees or enhanced protections, to compensate for the higher risk of a new system.

Explanation

The business operates in the 'superfood cafe' space, centered on products like acai bowls. While popular, this market segment is heavily trend-driven and highly competitive. There is a risk that consumer preferences could shift away from this trend over time, potentially impacting long-term sales and profitability. Your success could be tied to the continued popularity of a specific food trend.

Potential Mitigations

• With your business advisor, research the long-term market trends for health food concepts to gauge the sustainability of consumer demand.
• You should ask the franchisor about their strategy for product innovation and adapting the menu to evolving consumer tastes.
• Your financial advisor can help you create financial models that consider potential fluctuations in sales due to changing trends.

Explanation

This risk was not identified in the FDD package. Franchisor management lacking experience in the specific industry or in franchising can be a significant liability. Inexperienced leadership may lead to underdeveloped operational systems, poor strategic decisions, and inadequate franchisee support. According to Item 2, the franchisor's principals have been operating this brand and franchise system since 2013, indicating substantial direct experience.

Potential Mitigations

• It is important to have your business advisor thoroughly vet the background of the franchisor's key executives for relevant industry and franchise management experience.
• Engaging with current franchisees provides a direct assessment of the management team's competence and responsiveness.
• Your attorney can help you inquire if an inexperienced franchisor has retained experienced franchise consultants to guide their strategy.

Explanation

This risk was not identified in the FDD package. When a franchisor is owned by a private equity firm, there may be a focus on short-term profitability and a quick exit strategy, which can sometimes conflict with the long-term health of the franchise system and its franchisees. Item 1 indicates this franchisor is owned by its founding individuals and a related corporation, not by a private equity firm.

Potential Mitigations

• If considering a PE-owned franchise, it is wise for your business advisor to research the firm's track record with other franchise brands.
• Consulting with your attorney can help you understand the implications of the franchisor's right to sell or assign the system.
• Speaking with franchisees who have been with the system before and after a PE acquisition can provide valuable insight into any changes in support or culture.

Explanation

This risk was not identified in the FDD package. A franchisor might be a subsidiary of a larger parent company. If the franchisor is thinly capitalized or dependent on the parent for support, the parent's financial statements may be required for a complete risk assessment. Failure to disclose a parent company or provide its financials when required can obscure the true financial stability of the system. In this case, the parent entities are disclosed in Item 1.

Potential Mitigations

• Your attorney can help verify the franchisor's corporate structure and determine if a parent company's financial information is material and should have been disclosed.
• An accountant should review any parent guarantees or financial statements that are provided to assess their strength and the support they offer.
• If a parent company is a critical supplier, it's important to understand this dependency with the help of your business advisor.

Explanation

This risk was not identified in the FDD package. A franchisor is required to disclose information about its predecessors in Item 1. Omitting or downplaying negative history associated with a predecessor, such as litigation or high failure rates, can prevent you from seeing the full picture of the system's past performance and inherited challenges. Here, the predecessor is identified in Item 1 and its litigation history is disclosed in Item 3.

Potential Mitigations

• Your attorney should carefully review all disclosures related to predecessors in Items 1, 3, and 4.
• A business advisor can assist in researching the predecessor's public reputation and history, if possible.
• When possible, speaking with long-term franchisees who operated under the predecessor can provide invaluable historical context.