Explanation

This risk was not identified. The audited financial statements provided by Hilton Franchise Holding, LLC (Hilton LLC) in Exhibit C indicate a financially strong and profitable company. A franchisor's financial stability is crucial as it supports their ability to provide ongoing services, invest in brand development, and fulfill their contractual obligations to you. A weak franchisor could jeopardize your investment.

Potential Mitigations

• A comprehensive review of the franchisor's financial statements with your accountant is essential to confirm financial health.
• Understanding the franchisor’s primary revenue sources, such as royalties versus initial fees, can provide insight into system sustainability and should be discussed with your accountant.
• Engaging a business advisor to assess how the franchisor's financial condition might impact long-term brand growth can be beneficial.

Explanation

This risk was not identified. The data in Item 20 tables shows very low franchisee turnover, with zero terminations, non-renewals, or other cessations of business over the past three years. This is a positive indicator of system health and franchisee satisfaction. High turnover can often signal underlying problems with a franchise system's profitability, support, or franchisee-franchisor relations, so its absence here is noteworthy.

Potential Mitigations

• Discuss the low turnover rates with current franchisees to confirm the data reflects positive experiences.
• Your accountant can help you analyze the Item 20 tables over the three-year period to verify the stability.
• In discussions with the franchisor, your attorney can seek to understand the reasons for the positive trends in franchisee retention.

Explanation

This risk was not identified in the FDD package. While the system is growing, the rate of expansion does not appear to be so rapid as to strain the support systems of a large, established parent company like Hilton Worldwide. Overly rapid growth can sometimes lead to a decline in the quality of franchisor support, training, and site selection assistance, as resources become stretched thin.

Potential Mitigations

• It is wise to have your business advisor evaluate the franchisor's infrastructure and capacity for supporting its current and projected number of franchisees.
• Speaking with both new and established franchisees can provide perspective on whether support levels have remained consistent during growth.
• Your accountant should review the franchisor's financial statements for evidence of investment in support infrastructure.

Explanation

This risk was not identified. The Canopy by Hilton brand was launched in 2014 and is operated by Hilton LLC, a subsidiary of Hilton Worldwide, which has decades of experience in the hotel and franchising industry. An unproven system or inexperienced franchisor can present significant risks, including a lack of brand recognition, untested operating procedures, and inadequate franchisee support, which do not appear to be primary concerns here.

Potential Mitigations

• A review of the franchisor's history and the experience of its key executives, as detailed in Items 1 and 2, should be conducted with your business advisor.
• Engaging with a franchise attorney is important to understand the legal structure and history of the entity offering the franchise.
• You and your accountant can analyze the system's maturity and market position to gauge its long-term stability.

Explanation

This risk was not identified. The Canopy by Hilton brand is positioned within the established 'upper upscale lifestyle' hotel market segment, which is supported by a large, global hospitality company. While market trends can shift, this offering does not appear to be based on a short-lived fad. Investing in a fad business carries the risk of declining consumer interest after the initial trend fades, potentially leaving you with a long-term contractual obligation for an obsolete concept.

Potential Mitigations

• Engaging a business advisor to conduct independent market research can help assess the long-term consumer demand for the brand's specific concept.
• An analysis of the franchisor's commitment to ongoing research, development, and brand evolution with your business advisor is a prudent step.
• Your accountant can help evaluate the business model's resilience to economic cycles and shifting consumer tastes.

Explanation

This risk was not identified. The executive team detailed in Item 2 consists of seasoned professionals with extensive, long-term experience within Hilton and the broader hospitality industry. Management inexperience is a significant concern in franchising, as it can lead to poor strategic decisions and insufficient support for franchisees. The extensive experience detailed here suggests a stable and knowledgeable leadership team.

Potential Mitigations

• A thorough review of the executive biographies in Item 2 with a business advisor can confirm the depth of relevant industry and franchising experience.
• Asking current franchisees about their direct experiences with the management team can provide valuable insights into their competence and supportiveness.
• Legal counsel can help you research the professional history and reputation of key executives if any concerns arise.

Explanation

This risk was not identified in its typical form. Hilton Worldwide is a publicly traded company, not one privately owned by a traditional private equity (PE) firm with a short-term exit strategy. However, as a public company, management decisions are still driven by the need to deliver shareholder returns, which can sometimes create similar pressures. The direct risks associated with a typical PE fund structure, such as a quick sale of the brand, are not present here.

Potential Mitigations

• It is beneficial for your financial advisor to analyze the franchisor's public financial reports and investor calls to understand its strategic priorities.
• Discussing the impact of the public company structure on franchisee relations with current operators can offer valuable perspective.
• Your attorney should review the assignment clauses in the Franchise Agreement to understand your rights if the company is ever acquired.

Explanation

This risk was not identified. FDD Item 1 clearly discloses the franchisor’s parent company, Hilton Domestic Operating Company Inc., and the ultimate parent, Hilton Worldwide Holdings Inc. The relationship between these entities is described, and the consolidated financial statements provide a view of the franchisor's financial position within this corporate structure. Proper disclosure of parent companies is vital for assessing the true financial backing and stability of the franchisor entity.

Potential Mitigations

• Your accountant should review the financial statements in the context of the parent-subsidiary structure to assess overall financial health.
• Legal counsel can help clarify the legal and financial obligations between the parent and the franchisor entity.
• If a parent provides a guaranty, your attorney should carefully examine the terms of that specific guaranty.

Explanation

This risk was not identified. The FDD appears to provide a clear history of the franchisor and its predecessors in Item 1. There are no indications of undisclosed predecessor entities or attempts to obscure negative historical information related to prior operators of the brand. Understanding a system's full history, including any challenges faced under previous ownership, is important for a complete risk assessment.

Potential Mitigations

• A thorough review of Item 1 with your attorney can confirm the corporate lineage of the franchise system.
• If predecessors are mentioned, researching their history for any red flags, such as litigation or bankruptcy, is a worthwhile task for your legal team.
• Inquiring with long-term franchisees about their experiences under any previous ownership can provide valuable context.