Explanation

This risk was not identified in the FDD Package. The franchise system is shrinking, not growing rapidly. Rapid growth can strain a franchisor's ability to provide adequate support, training, and quality control to its franchisees. A system expanding faster than its support infrastructure can lead to franchisee dissatisfaction and operational problems, making it a key area for due diligence.

Potential Mitigations

• In any franchise, it is wise to have a business advisor help you assess whether the franchisor’s support infrastructure appears adequate for its current system size.
• Speaking with both new and established franchisees can provide insight into the consistency and quality of the franchisor's support over time.
• Your accountant can review the franchisor's investment in support staff and systems relative to its number of units.

Explanation

This risk was not identified in the FDD Package. Yogen Früz began offering franchises in 1989 and is an established brand. An unproven system presents higher risks because its business model, brand recognition, and support structures are not yet time-tested. Prospective franchisees in such systems face greater uncertainty regarding long-term viability and the adequacy of the franchisor's experience.

Potential Mitigations

• When evaluating any franchise, it's prudent for a business advisor to help you research the history of the brand and its management team.
• Contacting the earliest franchisees in a system can provide crucial insights into how the business model and support have evolved.
• An attorney can help you review the franchisor's corporate history for any signs of instability or frequent changes in ownership.

Explanation

This risk was not identified in the FDD Package. Item 2 indicates that the key executives, such as the Serruya co-founders, have been involved with the business since its inception in the 1980s. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, weak operational systems, and inadequate franchisee support. It is always a key area for due diligence.

Potential Mitigations

• It's a good practice to have a business advisor help you research the background and specific franchise experience of the key executives of any system.
• Discussing the quality and responsiveness of management with current franchisees provides valuable, real-world insight.
• Your attorney can help you investigate if the management team has a history of litigation or business failures.

Explanation

This risk was not identified in the FDD Package. Item 1 details a corporate ownership structure involving parent and affiliate companies, but there is no mention of private equity ownership. Such ownership can sometimes lead to a focus on short-term returns over the long-term health of the franchise system, potentially affecting support levels, fee structures, and the overall strategic direction of the brand.

Potential Mitigations

• For any franchise, it is beneficial to have a business advisor help you research the ownership structure and the track record of any parent company.
• Talking to franchisees who have experienced an ownership change can provide insight into the impact on the system.
• Your attorney can review the assignment clause in the franchise agreement to understand what happens if the franchisor is sold.

Explanation

This risk was not identified in the FDD Package. Item 1 clearly discloses the parent company, Yogen Früz Canada, Inc., and the ultimate parent, International Franchise Inc. Failure to disclose a parent company can obscure the true financial backing and control structure of a franchisor, which is a material omission. The franchisor's financials do, however, note a reliance on the parent for support, which is a critical disclosure in itself.

Potential Mitigations

• Your attorney can help verify a franchisor's corporate structure and identify any undisclosed parent or affiliate entities.
• If a parent company's financial guarantee is critical, an accountant should confirm if the parent's financial statements should have been included.
• Always question why a thinly-capitalized franchisor entity would not include financials for a parent that guarantees its performance.

Explanation

This risk was not identified in the FDD Package. Item 1 explicitly states, “We have no predecessors.” When a franchisor has a predecessor, it is important to scrutinize that entity's history for issues like litigation, bankruptcy, or high franchisee turnover, as these can indicate inherited systemic problems.

Potential Mitigations

• Your attorney should always confirm statements about predecessor history in Item 1 and investigate any disclosed predecessors.
• If a brand was acquired, a business advisor can help research the business's reputation and performance under its prior ownership.
• Speaking with franchisees who operated under a predecessor can offer valuable historical context.