Explanation

This specific risk was not identified in the FDD Package. Choice is a large, established public company with decades of franchising history across multiple brands. An unproven system risk typically applies to new franchisors without a significant operational track record, which can create uncertainty about the business model's viability and the franchisor's ability to provide long-term support. While not applicable here, evaluating a franchisor's history is always a crucial step in due diligence.

Potential Mitigations

• When evaluating any franchise, your business advisor should help you research the franchisor’s history and the track record of its specific brands.
• Consulting an attorney to understand the operating history of the specific brand you are considering is a key diligence step.
• An accountant should review the financial statements for several years to assess the franchisor's stability and experience.

Explanation

This specific risk was not identified in the FDD Package. The hotel industry is a mature and established market, not a temporary trend. However, it's important to consider that specific segments or concepts within the hotel industry can be subject to changing consumer preferences. Evaluating a brand's ability to adapt and remain relevant over the long term is a key part of due diligence, as your franchise agreement will outlast any short-term market trends.

Potential Mitigations

• Your business advisor can help you assess the long-term market demand for the specific hotel segment and brand you are considering.
• When reviewing Item 11, consider the franchisor's commitment to research, development, and system evolution to maintain brand relevance.
• An accountant can assist in creating financial models that project performance under various market conditions, not just the current environment.

Explanation

This specific risk was not identified in the FDD Package. Item 2 shows that the directors and principal officers of Choice have extensive and long-term experience in the hospitality and franchise industries. Assessing management experience is critical because an inexperienced team might provide inadequate support, make poor strategic decisions, or fail to grow the brand effectively, thereby increasing your business risk. Always review the backgrounds of the key executives responsible for the system's management.

Potential Mitigations

• When evaluating any franchise opportunity, it is prudent to have a business advisor help you research the backgrounds of the key management personnel.
• Discussing the management team's reputation and effectiveness with current franchisees provides valuable, real-world insight.
• An attorney can help you understand the roles and responsibilities of the individuals listed in Item 2.

Explanation

This specific risk was not identified in the FDD Package, as Choice is a publicly-traded company, not one owned by a private equity firm. This risk matters because PE ownership can sometimes lead to a focus on short-term profitability and a quick exit strategy, which may not align with the long-term health of the franchisees. This can manifest as increased fees, reduced support, or pressure to use affiliated vendors.

Potential Mitigations

• If a franchisor is owned by a private equity firm, your business advisor should research the firm's history with other franchise brands.
• It is wise to ask your attorney to scrutinize the franchisor's right to sell the system and the potential impact on your agreement.
• Talking to franchisees who have been through a sale of the system can provide valuable insights.

Explanation

This specific risk was not identified in the FDD Package. Choice Hotels International, Inc. is disclosed as the franchisor and its audited financial statements are provided. This risk is important because if a franchisor is a thinly capitalized subsidiary, the financial health of a parent company can be critical. A failure to disclose a parent or provide its financials when required could hide significant risks related to the true financial backing and stability of the entire enterprise.

Potential Mitigations

• Your attorney should always verify the corporate structure disclosed in Item 1 to ensure all relevant parent and affiliate entities are identified.
• If a parent company guarantees the franchisor's performance, an accountant must review the parent's financial statements.
• It is important to understand the full corporate structure and financial backing of the entity you are contracting with, which your business advisor can help assess.