Explanation

The franchisor's audited financial statements, along with those of its parent company, were reviewed and did not indicate financial instability. Healthy net income, positive member's equity, and an unqualified auditor's opinion suggest the franchisor has the financial resources to support the system. However, a franchisee's success is never guaranteed by the franchisor's financial health and requires your own due diligence.

Potential Mitigations

• Even with strong financials, having your accountant review the statements to understand revenue sources and liabilities is a crucial step.
• A business advisor can help you assess if the franchisor's financial strength translates into robust franchisee support and system investment.
• Consulting with your attorney about the terms of any financial guarantees provided by the parent company offers additional clarity.

Explanation

The FDD does not indicate a high franchisee turnover rate. Item 20 data shows very few terminations or non-renewals over the past three years, with steady system growth. This typically suggests a healthy franchise system with satisfied operators. High turnover can be a major red flag, indicating potential issues with profitability or franchisor support, but that does not appear to be the case here.

Potential Mitigations

• Although turnover is low, discussing the reasons for the few past departures with former franchisees from the list in Exhibit E2 can still provide valuable insights.
• Your business advisor can help you benchmark these low turnover rates against industry averages to confirm system health.
• Engage your attorney to review the termination and renewal clauses in the franchise agreement to understand the contractual landscape.

Explanation

This risk was not identified. The franchisor, Holiday Hospitality Franchising, LLC (Holiday), is part of a very large, mature system (IHG) and the number of outlets is substantial and growing at a manageable pace. A franchisor expanding too quickly can strain support systems, but Holiday appears to have the resources and scale to manage its growth. This is a positive indicator for a prospective franchisee.

Potential Mitigations

• An accountant can review the franchisor's financials in Item 21 to confirm that their investments in support infrastructure appear to keep pace with system growth.
• A discussion with a business advisor can help you evaluate the scalability of the franchisor's support systems.
• It is useful to ask both new and established franchisees about their perception of the quality and timeliness of franchisor support.

Explanation

This risk was not identified. The franchisor and its parent companies are established global leaders in the hotel industry with decades of experience and a large number of existing franchised and managed hotels. The business model is well-proven. An unproven system would present a higher risk of failure, but that does not appear to be the case here.

Potential Mitigations

• A business advisor can still help you research the specific track record of the Candlewood Suites brand within the larger IHG portfolio.
• Your accountant should review the provided financial statements in Item 21 to confirm the long-term financial health of this established system.
• Consulting with an attorney will help you understand all contractual obligations, even within a proven system.

Explanation

This risk was not identified. The extended-stay hotel concept is a well-established segment of the lodging industry, not a temporary trend. The franchisor, Holiday, and its parent IHG are major, long-standing players in the hotel business with a diverse portfolio of brands, indicating a focus on long-term market presence rather than a fad. Investing in a fad business carries the risk of declining consumer interest over time.

Potential Mitigations

• A business advisor can help you research the long-term outlook and competitive landscape for the extended-stay hotel market segment.
• Speaking with long-term franchisees can provide insight into the brand's historical resilience and adaptability to market changes.
• Your accountant can assist in developing financial models that account for normal economic cycles in the lodging industry.

Explanation

This risk was not identified. Item 2 of the FDD lists the franchisor's principal officers and executives, who appear to have extensive and long-term experience within the hospitality industry and with the parent company, IHG. Management inexperience can be a significant risk, as it may lead to poor support and strategic errors, but that does not seem to be a concern here.

Potential Mitigations

• A business advisor can help you independently research the professional backgrounds of the key executives listed in Item 2.
• It is still valuable to ask current franchisees about their direct experiences with the management team's competence and support.
• An attorney can review the franchise agreement to understand the extent of management's discretion in operational matters.

Explanation

Holiday is part of InterContinental Hotels Group PLC, a publicly traded company, not one owned by a private equity firm. This distinction can be important, as different ownership structures may lead to different corporate priorities. Private equity ownership sometimes introduces risks related to short-term investment horizons or aggressive fee structures, which are not the primary concern here.

Potential Mitigations

• Your business advisor can help you research the history and corporate strategy of the public parent company, IHG.
• It is wise for your accountant to review the franchisor's financial statements for any signs of unusual debt structures or dividend policies.
• An attorney can help you understand the assignment clauses in the franchise agreement, which are relevant regardless of ownership structure.

Explanation

This risk was not identified. The FDD clearly discloses the parent companies, including Six Continents Hotels, Inc. and the ultimate parent, InterContinental Hotels Group PLC. Furthermore, the FDD provides audited financial statements for both the franchisor (Holiday) and its direct parent (Six Continents Hotels, Inc.), which appears to be the guarantor of key obligations. This level of transparency is a positive sign.

Potential Mitigations

• Your attorney should review the FDD and the License Agreement to confirm the identity of the entity that guarantees the franchisor's obligations.
• It is prudent for your accountant to analyze the provided parent company financials to assess the strength of any guarantees.
• A business advisor can help you understand the complete corporate structure and how it might impact franchisee support.

Explanation

This risk was not identified. Item 1 indicates that Holiday has offered licenses for Candlewood Suites since 2003 and that its own predecessors have been in the hotel business since 1953. The document does not mention any predecessors from which substantial assets were acquired that would have a separate, potentially negative, history. A clean predecessor history is a positive indicator for a prospective franchisee.

Potential Mitigations

• Your attorney can help you verify the corporate history outlined in Item 1 through public records if desired.
• It is still valuable to ask long-term franchisees about the history of the brand and any significant past changes in ownership or management.
• A business advisor can help you research the brand's history and reputation within the hotel industry.