Explanation

This risk was not identified. The financial statements in Item 21, audited by Ernst & Young, show Choice Hotels International, Inc. (Choice) to be a large, profitable, and financially stable public company. A strong financial position suggests the franchisor has sufficient resources to support its system, invest in its brands, and fulfill its contractual obligations. This financial stability is a positive factor for a prospective franchisee considering a multi-million dollar investment.

Potential Mitigations

• To understand the full financial context, have your accountant review the consolidated financial statements, including all footnotes and the statement of cash flows.
• A business advisor can help you compare Choice's financial health to other large hospitality franchisors to gauge its relative strength in the industry.
• Discuss the franchisor's financial condition and its implications for long-term brand support with your financial advisor.

Explanation

This risk was not identified. Choice Hotels is a very large, mature franchise system with thousands of units, as shown in Item 1 and Item 20. Its financial statements in Item 21 demonstrate substantial resources. The risk of support infrastructure being overwhelmed by growth appears low given the system's scale and long history of managing a large number of franchisees. The company's growth seems managed and is not characterized by the explosive pace typical of an emerging brand.

Potential Mitigations

• Engage a business advisor to assess the support structure relative to the number of franchisees per support manager.
• In discussions with current franchisees, specifically inquire about the quality and responsiveness of support services.
• Your attorney can review the franchisor's contractual support obligations in Item 11 to ensure they are clearly defined.

Explanation

This risk was not identified. As disclosed in Items 1, 2, 20, and 21, Choice is one of the world's largest and longest-operating hotel franchisors. The Comfort brand itself was established in 1981. The system is mature, the management team is experienced in both hospitality and franchising, and the business model is well-established. Therefore, the risks associated with an unproven concept or an inexperienced franchisor are not present here.

Potential Mitigations

• A business advisor can still help you analyze the long-term performance and strategic direction of this specific hotel brand within the larger Choice portfolio.
• Discussing the brand's current competitive position with existing franchisees is still a valuable due diligence step.
• Your attorney should review the FDD for any recent changes in ownership or strategy that might affect the system's stability.

Explanation

This risk was not identified. The business model, which involves operating a franchised hotel, is a well-established and enduring segment of the lodging industry. As detailed in Item 1, the franchisor and its brands have been operating for many decades. The demand for mid-scale lodging is consistent and not dependent on short-term trends, suggesting the business model has long-term viability and is not a fad.

Potential Mitigations

• To assess local market viability, a real estate professional can help you analyze long-term demand drivers in your specific area.
• A business advisor can help you research the competitive landscape and the historical performance of the mid-scale hotel segment.
• Reviewing the franchisor's brand evolution plans in Item 11 with a business advisor will provide insight into their long-term strategy.

Explanation

This risk was not identified. Item 2 of the FDD lists the franchisor's directors and officers, detailing their extensive and long-term experience in both the hospitality industry and in managing a large-scale franchise system. Many executives have been with Choice or other major hotel companies for several years. This level of experience suggests a deep understanding of the business and franchise relationship, which is a positive factor for prospective franchisees.

Potential Mitigations

• A business advisor can help you research the public reputation and track record of the key executives listed in Item 2.
• During any interactions with the franchisor's team, you can assess their professionalism and knowledge of the system.
• Speaking with existing franchisees can provide valuable insight into the management team's effectiveness and relationship with operators.

Explanation

This risk was not identified. Choice Hotels is a publicly-traded company, not one owned by a private equity firm, as indicated in Items 1 and 21. The risks associated with short-term profit motives often linked to private equity ownership, such as rapid fee increases or cuts in support to prepare for a quick sale, are not inherently present. Decision-making is subject to public company governance standards, which typically involve a longer-term strategic focus.

Potential Mitigations

• An accountant can analyze the company's public filings (10-K, 10-Q) to understand its long-term financial strategies and shareholder base.
• Your financial advisor can review the company's dividend history and stock performance as indicators of its stability and shareholder focus.
• Your attorney can explain the differences in governance and disclosure obligations between a public company and a PE-backed firm.

Explanation

This risk was not identified. Item 1 and the organizational chart information clearly identify Choice Hotels International, Inc. as the franchisor and ultimate parent company. The financial statements provided in Item 21 and Exhibit C are for the consolidated entity, providing a full picture of the financial health of the organization you are contracting with. There are no signs of a thinly capitalized subsidiary being used as the franchisor while a wealthier parent remains undisclosed.

Potential Mitigations

• Your attorney can confirm the corporate structure and ensure that the entity signing the Franchise Agreement is the same one whose financials are disclosed.
• An accountant should review the consolidated financial statements in Exhibit C to confirm they represent the entire business enterprise.
• Verifying there are no undisclosed parent guaranties or obligations is a key due diligence step for your attorney.

Explanation

This risk was not identified. Item 1 clearly outlines the corporate history of Choice and its recent major acquisition of Radisson Hotels Americas. The litigation and bankruptcy history for the franchisor and its predecessors are disclosed in Items 3 and 4, respectively. The disclosures appear comprehensive, providing a clear lineage for the franchise system and transparency regarding historical challenges, allowing for a more informed risk assessment.

Potential Mitigations

• Your attorney should still carefully review the predecessor information in Items 1, 3, and 4 for any subtle red flags.
• A business advisor could help you research public information on any named predecessors to see if their history aligns with the FDD's disclosures.
• When speaking with long-term franchisees, you can ask about their experience under any previous ownership or predecessor entities.