Explanation

This risk was not identified. The FDD includes audited financial statements for Choice Hotels International, Inc. (Choice Hotels) which show it is a large, publicly-traded company with substantial revenues and net income. While the balance sheet shows negative shareholders' equity, this appears related to a long-standing treasury stock program and is not an indicator of financial instability for a company of this scale and profitability. The franchisor appears to have sufficient financial resources to support the system.

Potential Mitigations

• Engaging an accountant to review the franchisor's financial statements, including all notes and the auditor's opinion, is a crucial step.
• A business advisor can help you assess if the franchisor's financial health supports long-term growth and brand investment.
• Discuss any concerns raised by your accountant about the franchisor's financial condition directly with the franchisor.

Explanation

This risk was not identified. The data in Item 20 indicates that the Comfort brand is mature, with a stable to slightly contracting number of outlets over the past year. The franchisor, Choice Hotels, is a large, established entity with extensive resources as shown in Item 21. The risks associated with a franchisor expanding too quickly and outpacing its support capabilities do not appear to be present here.

Potential Mitigations

• Your business advisor can help you evaluate whether the franchisor's support infrastructure is appropriate for the system's current size.
• Speaking with franchisees who have joined at different times can provide insight into the consistency and quality of the support provided.
• An accountant should still review the franchisor's allocation of resources to support services versus expansion initiatives.

Explanation

This risk was not identified. Choice Hotels is one of the oldest and largest hotel franchisors in the world, having been in business since 1939 and franchising the Comfort brand since 1981. The business model is well-established, and the management team disclosed in Item 2 has extensive experience in the hospitality and franchising industries. The risks associated with an unproven system or inexperienced management are not present.

Potential Mitigations

• Even with an established brand, consulting a business advisor to analyze the brand's current market position and growth strategy is a prudent measure.
• Your attorney should still review the entire franchise agreement, as established systems often have highly refined and one-sided contracts.
• Speaking with current franchisees can confirm whether the franchisor's long experience translates into effective support and a healthy system.

Explanation

This risk was not identified. The Comfort brand operates in the traditional and well-established mid-scale hotel segment of the lodging industry. The concept is not based on a new or fleeting trend. Consumer demand for hotel accommodations is persistent, and the business model has a long history of market presence and adaptation. The risk of the business being a short-term fad is low.

Potential Mitigations

• A business advisor can help you analyze long-term trends in the lodging industry to confirm the brand's continued relevance.
• Investigating the brand's competitive position against other established hotel chains is a worthwhile exercise.
• Your accountant can help model the business's resilience to typical economic cycles.

Explanation

This risk was not identified. Item 2 discloses the business experience of the franchisor's directors and officers. The management team of Choice Hotels consists of individuals with many years, and often decades, of experience in the hospitality industry and in managing large-scale franchise systems. The risk associated with an inexperienced management team appears to be low.

Potential Mitigations

• It is still advisable for your business advisor to research the public reputation and track record of the current key executives.
• Discussions with current franchisees can provide insight into the effectiveness and vision of the current leadership team.
• Your attorney can help you understand the management structure and how corporate decisions might impact individual franchisees.

Explanation

This risk was not identified in the typical sense of a private equity fund. Choice Hotels International, Inc. is a publicly-traded company, not a PE-owned entity. However, as a public company, management decisions are subject to the pressures of shareholder expectations and quarterly financial performance, which can create similar dynamics focused on revenue growth and cost management. This structure is different from a founder-led or family-owned business.

Potential Mitigations

• Your financial advisor can help you understand the dynamics of a publicly-traded franchisor and how shareholder interests can influence system-wide decisions.
• A review of the company's recent investor calls and public filings with your accountant can provide insight into management's strategic priorities.
• Speaking with current franchisees about recent changes in fees or support levels can offer a practical view of the franchisor's focus.

Explanation

This risk was not identified. Item 1 clearly identifies Choice Hotels International, Inc. as the franchisor and discloses its various affiliates and subsidiaries. Item 21 provides the consolidated audited financial statements for the parent public company, Choice Hotels. There are no indications of an undisclosed parent company whose financials are necessary for a complete risk assessment.

Potential Mitigations

• Your attorney should confirm that all entities you will be contracting with are properly disclosed in Item 1 and Item 22.
• An accountant's review of the provided consolidated financial statements in Exhibit C is essential to understand the overall financial health of the franchisor entity.
• It is prudent to verify with the franchisor that there are no other parent or affiliate guarantees that are material to the franchise relationship.

Explanation

This risk was not identified. Item 1 discloses the corporate history, including name changes from Quality Courts Motels, Inc. The FDD also details the acquisition of the Radisson brand. Item 3 discloses litigation involving Radisson entities that are now part of Choice Hotels. The FDD appears to properly disclose the history of the franchisor and its predecessors, providing the necessary context regarding historical litigation and corporate changes.

Potential Mitigations

• A franchise attorney should review the predecessor and affiliate information in Items 1, 3, and 4 to ensure all historical liabilities and legal issues are understood.
• Your business advisor can help you research the history and reputation of any significant predecessor brands.
• You might ask long-term franchisees about their experiences during any major corporate transitions, such as the Radisson acquisition.