Explanation

This is a very young franchise system, with only four franchised hotels in operation at the end of 2024. The Item 20 tables show no terminations, transfers, or other cessations over the last three years. While this means there is no evidence of high turnover, it also signifies a lack of historical data to assess franchisee success or failure rates, which is a risk in itself. There is a very limited pool of franchisees to contact for due diligence.

Potential Mitigations

• It is crucial to speak with all four of the current operating franchisees listed in Item 20 to understand their experiences with this new system.
• A business advisor can help you assess the risks inherent in joining a young system with a limited performance history.
• Your accountant should help you create conservative financial projections, as there is no established track record of franchisee profitability.

Explanation

The Compass by Margaritaville concept is tied to the Margaritaville lifestyle brand, which has proven durable. However, this specific 'select service hotel' application is relatively new and operates in a highly competitive market. While the brand has broad recognition, the long-term consumer demand specifically for this hotel sub-brand is not as established as the parent brand's other ventures. You should assess if this specific concept has lasting appeal beyond the core brand's popularity.

Potential Mitigations

• Engage a hospitality consultant or business advisor to independently research the long-term market demand for upscale, boutique select-service hotels.
• Question the franchisor on its strategies for evolving the Compass brand to ensure it remains relevant and competitive over the 20-year term.
• Your financial advisor can help model different occupancy and revenue scenarios to test the business's resilience to shifts in travel trends.

Explanation

This risk was not identified in the FDD package. While the ultimate parent company, Margaritaville Holdings, has private equity involvement from a 2014 transaction, the primary risk stems from the financial instability disclosed in its own financial statements, rather than from typical private equity behaviors like short-term focus. Therefore, the more direct and severe risk is addressed in 'Disclosure of Franchisor's Financial Instability'.

Potential Mitigations

• It is still wise to ask your franchise attorney to review the franchisor's ownership structure for any signs of influence that could affect long-term strategy.
• A business advisor can help you research the track record of any major investors in the parent company, if identifiable.
• In discussions with existing franchisees, inquire about any noticeable changes in company culture or support that could be tied to investor priorities.

Explanation

The FDD discloses that Margaritaville Holdings is the parent company and guarantor of the franchisor's obligations. The FDD package appropriately includes the parent's audited financial statements in Exhibit G. Therefore, the risk of non-disclosure is not present, as the parent company and its financial status are disclosed. However, the contents of those financial statements present a separate, significant risk regarding financial instability.

Potential Mitigations

• Your accountant should perform a thorough review of the provided parent company financial statements to assess their financial health.
• It is important to have your attorney review the specific terms of the parent company guarantee to understand the scope and limitations of the protection it offers.
• A business advisor can help you assess the overall corporate structure and the relationship between the franchisor and its parent.

Explanation

This risk was not identified in the FDD package. Item 1 states that the franchisor, Compass LLC, has no predecessors. Therefore, there is no risk of undisclosed negative history from a prior entity that operated the franchise system.

Potential Mitigations

• During your due diligence, it is still a good practice to ask the franchisor if any of its key intellectual property or systems were acquired from other companies.
• Your attorney can conduct a public records search to confirm the corporate history of the franchisor entity.
• A business advisor can help you research the history of the key executives listed in Item 2 for any involvement with prior, unsuccessful franchise systems.