Explanation

The financial statements for Choice Hotels International, Inc. (Choice) provided in Exhibit C do not indicate financial instability. The company is profitable with growing revenues. While the balance sheet shows a shareholder deficit, this is due to significant treasury stock from share buybacks, a common practice for public companies, and is offset by strong retained earnings. The auditor's report does not mention any 'going concern' issues. This specific risk was not identified.

Potential Mitigations

• An experienced franchise accountant should review the franchisor's financial statements to confirm their stability and operating health.
• It is wise to have your accountant analyze trends in revenue, profitability, and cash flow over the past several years.
• Understanding the notes to the financial statements is critical, and your accountant can provide essential context.

Explanation

The FDD does not indicate that the franchise system is growing at an unsustainable rate. Item 20 tables show stable and moderate net growth in the number of outlets over the past three years. This suggests that the franchisor's support infrastructure is not likely to be overstretched by excessively rapid expansion. Therefore, this specific risk was not identified in the provided documents.

Potential Mitigations

• A business advisor can help assess whether the franchisor's support staff and systems are adequate for its current size and growth rate.
• In discussions with current franchisees, it is useful to inquire about the quality and timeliness of the support they receive.
• Reviewing the franchisor's financial statements with an accountant can help determine if they are investing sufficiently in support infrastructure.

Explanation

Choice is a long-established hospitality company, founded in 1941, and the Ascend Hotel Collection brand has been operating since 2008. The FDD reflects a mature and extensive franchise system, not a new or unproven business concept. Therefore, the risks associated with an emerging franchisor are not applicable here.

Potential Mitigations

• When evaluating any franchise, it is important to have your attorney review the franchisor’s history and experience as detailed in Item 1.
• Your business advisor can help you assess the track record and brand recognition of the specific franchise concept.
• Speaking with long-term franchisees can provide insight into the system's stability and evolution over time.

Explanation

The Ascend Hotel Collection is a 'soft brand' for independent, boutique, and historic hotels. This is a well-established and growing segment within the hospitality industry, not a concept based on a short-term trend or fad. The business model relies on enduring traveler interest in unique, localized hotel experiences. This risk was not identified.

Potential Mitigations

• A business advisor can help you conduct independent market research to evaluate the long-term consumer demand for the franchise's products or services.
• Assess the franchisor's history of innovation and adaptation to changing market conditions.
• Analyzing the business model's resilience to economic shifts is a key task to perform with your financial advisor.

Explanation

The executive biographies in Item 2 of the FDD describe a management team with extensive experience in the hospitality and franchising industries. The franchisor itself has been in business for many decades. The risks associated with an inexperienced management team are not present in this FDD package.

Potential Mitigations

• Always have your business advisor assist in vetting the backgrounds of the key executives listed in Item 2.
• It is beneficial to ask current franchisees about their direct experiences with the franchisor's management and support teams.
• Your attorney can help you research the public record of the franchisor and its executives for any undisclosed concerns.

Explanation

This risk was not identified in the FDD package. Choice is a publicly-held company, and there is no disclosure in Item 1 indicating that it is owned or controlled by a private equity firm. The risks typically associated with a PE firm's short-term investment horizon, such as sudden changes in fees or support levels to maximize investor returns, do not appear to be present.

Potential Mitigations

• Your attorney should always verify the ownership structure of the franchisor as disclosed in Item 1.
• If a franchisor is owned by a private equity firm, researching the firm's history with other franchise brands is a crucial due diligence step for your business advisor.
• It is wise to ask current franchisees about any significant changes since an ownership change.

Explanation

This specific risk was not identified in the FDD package. Item 1 identifies Choice Hotels International, Inc. as the franchisor and does not indicate it is a subsidiary of another entity that should have been disclosed. The provided financial statements in Item 21 appear to be for the parent-level company, providing a comprehensive view of the organization's financial health.

Potential Mitigations

• Your attorney can help verify the franchisor's corporate structure and identify any undisclosed parent companies that may be material to your investment.
• If a parent company exists and provides guarantees, your accountant must ensure the parent's financial statements are included and reviewed.
• Understanding the full corporate structure is essential for assessing the ultimate source of support and stability for the franchise system.

Explanation

The FDD discloses the recent acquisition of Radisson, which could be considered a predecessor in some contexts, but there is no indication that its history presents any hidden or undisclosed risks. The material litigation disclosed in Item 3 appears to relate primarily to Choice's own operations rather than inherited issues. Therefore, this specific risk was not identified.

Potential Mitigations

• A franchise attorney should always carefully scrutinize Item 1 for any mention of predecessors.
• If a franchisor has a predecessor, it's important to investigate the predecessor's history of litigation and bankruptcy in Items 3 and 4.
• Speaking with franchisees who have been with the system through an acquisition can provide valuable insight.