Explanation

The Maryland State Addendum discloses that the state has required a financial assurance based on the franchisor's financial condition, which may indicate a past concern. However, the included audited financial statements for 2023 and 2024 show profitability and positive, growing net worth, which are strong indicators of current financial stability. This presents a mixed but generally positive picture that warrants professional review.

Potential Mitigations

• A thorough review of the complete financial statements in Exhibit C, including all footnotes and contingent liabilities, with your accountant is crucial.
• It is advisable to discuss the nature of the Maryland financial assurance requirement with your attorney to understand its historical context.
• Engaging a business advisor to understand how the company's financial health impacts its ability to support franchisees is recommended.

Explanation

This risk was not identified in the FDD package. Rapid system growth can sometimes strain a franchisor's ability to provide adequate support to all franchisees. It is a factor to consider when a franchisor is adding a very high number of units in a short period, as support systems like training, site selection, and operations coaching may not keep pace with the expansion.

Potential Mitigations

• A business advisor can help you assess if a franchisor's support infrastructure seems adequate for its current system size and growth rate.
• When speaking with franchisees, it's wise to ask about the quality and timeliness of the support they currently receive.
• Your accountant can review a franchisor's financials to see if they are reinvesting in support systems to match unit growth.

Explanation

This risk was not identified in the FDD. The Yogurtland concept, centered on frozen yogurt, operates in an established segment of the food service industry. While subject to trends and competition, it is not considered a short-lived fad. A fad business carries the risk that consumer interest may decline sharply after an initial period of popularity, potentially leaving you with a failing business and ongoing contractual obligations.

Potential Mitigations

• A business advisor can help you research the long-term consumer demand and market trends for any franchise concept.
• You should evaluate a franchisor's plans for product innovation and adaptation to stay relevant over the long term.
• An accountant can assist in creating financial projections that consider different market scenarios, not just current popularity.

Explanation

This risk was not identified in the FDD. The executive team detailed in Item 2 includes individuals with long-term experience within the Yogurtland system and others with significant, relevant experience from other major franchise brands. Inexperienced management can be a risk if the leadership team lacks a track record in franchising or the specific industry, which can lead to poor strategic decisions and inadequate support for franchisees.

Potential Mitigations

• It is always prudent to have a business advisor help you research the backgrounds and track records of the franchisor's key executives.
• Asking current franchisees about their confidence in the leadership team's direction and competence is a key due diligence step.
• An attorney can help you understand the management team's obligations as outlined in the franchise agreement.

Explanation

This risk was not identified in the FDD, as there is no indication that the franchisor is owned by a private equity firm. When a PE firm owns a franchisor, there can be a risk that decisions are focused on short-term investor returns rather than the long-term health of the franchisees and the brand. This can sometimes manifest as reduced support, increased fees, or a quick sale of the system.

Potential Mitigations

• If a franchisor is PE-owned, a business advisor can help research the firm's reputation and history with other franchise brands.
• Asking franchisees about any changes in the system since a PE acquisition is a crucial part of due diligence.
• Your attorney can explain the implications of assignment clauses in the franchise agreement, which are relevant if a PE firm plans to sell the system.

Explanation

This risk was not identified in the FDD. The franchisor's corporate structure and its relationship with its affiliates are disclosed in Item 1. Sometimes, if a franchisor is a small subsidiary of a large, undisclosed parent company, it can obscure the true financial backing and stability of the system. In this case, the key entities appear to be disclosed.

Potential Mitigations

• Your attorney can help you understand the corporate structure disclosed in Item 1 and its implications.
• If a parent company guarantees the franchisor's obligations, your accountant should review the parent's financial statements if provided.
• A business advisor can help investigate the relationships between the franchisor and any affiliated companies.