Explanation

This FDD package does not indicate financial instability for Hilton Franchise Holding LLC (HFH LLC). The audited financial statements in Exhibit C show significant profitability, positive net worth, and strong cash flow. Assessing a franchisor's financial health is crucial, as a weak company may be unable to provide support, invest in the brand, or fulfill its obligations, potentially jeopardizing your entire investment.

Potential Mitigations

• Engaging an accountant to review the franchisor's financial statements annually is crucial for monitoring their ongoing financial health.
• Your business advisor should help you understand how the franchisor's financial stability might impact its ability to support its franchisees.

Explanation

The franchisee turnover rates disclosed in Item 20 do not appear to be high. For 2024, the total number of terminations, non-renewals, and other cessations was approximately 3.3% of the franchised outlets at the start of the year. Low turnover can suggest a stable system and franchisee satisfaction. Consistently high turnover can be a significant red flag indicating potential systemic problems.

Potential Mitigations

• Your attorney can help you frame questions for current and former franchisees about their satisfaction and reasons for leaving, if any.
• It is wise to have your accountant help you calculate the effective turnover rate from Item 20 data over a three-year period to identify any negative trends.

Explanation

The data in Item 20 does not suggest that the franchise system is growing at a rate that would outpace its support capabilities. While there is steady growth, it does not appear to be uncontrolled. When evaluating a franchise, it's important to ensure the franchisor has the infrastructure and financial resources to support its growth, as overly rapid expansion can sometimes lead to a decline in franchisee support and service quality.

Potential Mitigations

• Discuss the franchisor's plans for scaling support infrastructure with your business advisor to ensure it aligns with unit growth.
• During your due diligence calls, asking existing franchisees about the current quality and responsiveness of franchisor support is a valuable step.

Explanation

Hilton and the DoubleTree brand are well-established, mature franchise systems with a long operating history, as detailed in Item 1. This is not a new or unproven franchise. Investing in an unproven system carries higher risks, as it may lack brand recognition, have underdeveloped support structures, or an untested business model. The established nature of this brand is a positive factor.

Potential Mitigations

• A thorough review of the franchisor's history and brand recognition in your specific market with a business advisor is always recommended.
• Even with an established brand, consulting an accountant to review the financial statements in Item 21 provides a clear picture of its current health.

Explanation

The business model, operating in the established upscale hotel industry, does not appear to be a fad. The DoubleTree brand has a long history of consumer demand and is not tied to a fleeting trend. Investing in a fad business can be risky because consumer interest may decline, potentially leaving you with a long-term contractual obligation for a business that is no longer viable.

Potential Mitigations

• A business advisor can help you assess the long-term market demand for this type of hotel service in your specific geographic area.
• Your attorney should review the franchise term and your obligations to ensure they align with a long-term business strategy.

Explanation

The management team detailed in Item 2 possesses extensive experience in both the hotel industry and in managing large-scale franchise systems. Inexperienced leadership can be a significant risk, as it may lead to poor strategic decisions, inadequate franchisee support, and other systemic problems. The deep experience of the management team at HFH LLC and its parent company is a significant strength.

Potential Mitigations

• It is always prudent to research the recent performance and reputation of the key executives listed in Item 2 with your business advisor.
• When speaking with existing franchisees, you can inquire about their perception of the management team's competence and support for the system.

Explanation

As a publicly traded company (NYSE: HLT), Hilton Worldwide, the ultimate parent company, is responsible to its shareholders, which can influence its strategic decisions. This may lead to a focus on metrics like quarterly earnings and stock price. While not owned by a private equity firm with a specific exit timeline, decisions could still prioritize broad shareholder value over the specific interests of an individual franchisee.

Potential Mitigations

• Reviewing public financial reports and shareholder communications for Hilton Worldwide (HLT) with your financial advisor can provide insight into its strategic priorities.
• Your attorney should review the assignment clauses in the Franchise Agreement to understand what happens if the company is acquired.

Explanation

This risk is not present. The FDD clearly discloses the parent company, Hilton Domestic Operating Company Inc., and the ultimate parent, Hilton Worldwide Holdings Inc., in Item 1. The franchisor's financial statements are provided and audited. Proper disclosure of parent companies and their financial data (when required) is essential for you to assess the overall stability and resources backing the franchise system.

Potential Mitigations

• It is beneficial to have your attorney verify the corporate structure if a franchisor is a newly formed or thinly capitalized subsidiary.
• Your accountant can help assess whether a parent company's financial guarantee, if offered, provides meaningful security for the franchisor's obligations.

Explanation

The FDD in Item 1 provides a detailed history of predecessors for the DoubleTree brand, including Doubletree Franchise LLC and Doubletree Hotel Systems, Inc. The history appears extensive and transparent. When evaluating a franchise, it is important to review predecessor history for any red flags, such as past litigation or bankruptcy, which are not present here.

Potential Mitigations

• Your attorney should carefully review the predecessor information in Items 1, 3, and 4 to ensure a complete understanding of the brand's history.
• Asking long-term franchisees about their experience under any predecessors can provide valuable historical context.