Explanation

This risk was not identified in the FDD package. Item 20 data shows no franchised outlets have been opened or closed, as this is a new system. Generally, high franchisee turnover, including terminations and non-renewals, can be a major red flag indicating systemic problems such as unprofitability, poor support, or franchisee dissatisfaction. Careful analysis of these trends over several years is a critical part of due diligence for any established franchise system.

Potential Mitigations

• With an established system, it is crucial for your accountant to analyze the turnover tables in Item 20 for any negative trends.
• Speaking with former franchisees from the Item 20 list is a vital step your business advisor should recommend to understand why they left.
• Your attorney can help you formulate questions for the franchisor regarding the reasons for any significant number of unit closures or terminations.

Explanation

This risk was not identified, as the franchisor is a new system with no franchisees and only one affiliate-owned outlet. For other systems, rapid growth shown in Item 20 can be a risk if the franchisor's support infrastructure, detailed in Item 11, does not keep pace. This can lead to diluted support, poor quality control, and inadequate assistance for new and existing franchisees as the franchisor becomes overextended.

Potential Mitigations

• For a growing system, a business advisor can help you assess if the franchisor's support staff and resources are expanding in line with unit growth.
• Posing questions to both new and veteran franchisees about the current quality and timeliness of support is an important due diligence step.
• An accountant's review of the franchisor's financials can help determine if they are reinvesting in the infrastructure needed to support growth.

Explanation

The business operates in the competitive quick-service restaurant market, focusing on chicken wings. While this is a popular and established market segment, not a temporary fad, intense competition from national and regional chains could impact your profitability. Success will depend on the brand's ability to differentiate itself and maintain consumer demand over the long term. The concept itself is not identified as a high-risk fad, but market saturation is a relevant business consideration.

Potential Mitigations

• Conducting independent market research with a business advisor to assess local competition and demand is a prudent step.
• Evaluate the franchisor's long-term vision and plans for product innovation to ensure the brand can remain competitive.
• You should analyze the unique selling propositions of the brand, such as its 25 flavors and Halal options, to gauge its market sustainability.

Explanation

This risk was not identified in the FDD package. Item 1 indicates the franchisor does not have a parent entity and there is no mention of private equity ownership. In other cases, private equity ownership can introduce risks, as the firm's primary goal may be short-term returns for its investors. This can sometimes lead to decisions that benefit the PE firm over the long-term health of franchisees, such as cutting support or increasing fees.

Potential Mitigations

• If a franchisor is PE-owned, it's wise to have a business advisor help research the firm's history with other franchise brands.
• Discussing any changes in the system since the PE acquisition with current franchisees is a key due diligence step.
• An attorney should review the franchise agreement for any terms that seem to prioritize short-term financial extraction over system health.

Explanation

This risk was not identified, as Item 1 of the FDD clearly states that ATL Wing Spot has no parent entities. In situations where a franchisor is a subsidiary of a larger company, it is important for the FDD to disclose the parent company and, if necessary, provide its financial statements. This ensures a prospective franchisee can assess the stability and resources of the ultimate controlling entity, which may be crucial to the franchisor's viability.

Potential Mitigations

• Your attorney can help verify a company's corporate structure to confirm the accuracy of parent company disclosures.
• If a parent company exists and guarantees the franchisor's performance, an accountant should review the parent's financial statements.
• Understanding the relationship and dependencies between a franchisor and its parent is a key topic to discuss with a business advisor.

Explanation

This risk was not identified in the FDD package. Item 1 indicates that the franchisor has no predecessors. For franchises that have been sold or reorganized, a thorough review of the predecessor's history is important. Issues like past litigation, bankruptcy, or high franchisee failure rates under a predecessor could indicate inherited problems or a flawed business model that may continue to affect the system under the new ownership, even if not immediately apparent.

Potential Mitigations

• Your attorney should carefully review Item 1 for any disclosed predecessors and their history in Items 3 and 4.
• A business advisor can assist in researching a predecessor's public reputation and track record.
• Speaking with long-term franchisees who operated under the predecessor can provide invaluable historical context.

Explanation

This risk was not identified, as Item 3 of the FDD states that no litigation is required to be disclosed. Generally, a pattern of lawsuits filed by franchisees against the franchisor alleging fraud, misrepresentation, or breach of contract is a major red flag. Similarly, an unusually high number of lawsuits initiated by the franchisor against its franchisees could signal an overly aggressive or punitive operational culture, which could create a difficult relationship.

Potential Mitigations

• When litigation is disclosed, having your attorney analyze the nature, frequency, and outcomes of the cases is critical.
• A business advisor can help you understand if the litigation points to deeper systemic problems within the franchise.
• It is important to discuss any disclosed litigation with current and former franchisees to get their perspective.