Explanation

This risk was not identified. The FDD package does not indicate that the franchisor is undergoing rapid expansion that might strain its support systems. In fact, Item 20 data shows a net decline in the number of Econo Lodge units over the last three years. Unchecked growth can sometimes dilute brand support and quality control, so franchisors must balance expansion with their capacity to assist franchisees.

Potential Mitigations

• A discussion with your business advisor about the franchisor's growth strategy can provide insight into their long-term vision.
• Asking current franchisees about the quality and timeliness of support can give you a real-world perspective on the franchisor's capabilities.
• Your attorney can review the franchisor's obligations in the Franchise Agreement to understand the contractually guaranteed level of support.

Explanation

This risk was not identified. Choice Hotels is a large, publicly-traded company with a very long history in the hotel franchising industry, dating back to 1939, and has franchised the Econo Lodge brand since 1990. Investing in a new or unproven franchise system can carry higher risks due to the lack of a track record, minimal brand recognition, and potentially underdeveloped support systems.

Potential Mitigations

• When evaluating any franchise, it's wise to have your business advisor research the franchisor's history and the maturity of the specific brand.
• A review of the executive team's experience in Item 2 with your business advisor can help assess the leadership's franchising knowledge.
• Consulting with an attorney can help clarify the franchisor's history as disclosed in Item 1 of the FDD.

Explanation

This risk was not identified. The Econo Lodge brand operates in the economy lodging sector, which is a long-established and fundamental part of the travel industry rather than a temporary trend. A fad-based business can be risky because consumer interest may decline quickly, potentially leaving you with a long-term franchise obligation for a business with diminished demand.

Potential Mitigations

• Engaging a business advisor to assess the long-term consumer demand for the specific industry is a crucial step in due diligence.
• An accountant can help you model the financial viability of a business under various market conditions to test its resilience.
• Seeking legal counsel to understand your long-term contractual commitments is always advisable.

Explanation

This risk was not identified. Item 2 of the FDD details the business experience of the franchisor's officers and directors, showing a management team with extensive and long-term experience in the hotel and franchising industries. Inexperienced leadership can pose a risk, as it may lead to strategic errors, inadequate support, and a lack of understanding of the franchisee-franchisor relationship.

Potential Mitigations

• A thorough review of the management team's background in Item 2 with a business advisor is a key part of due diligence.
• It is always a good practice to speak with current franchisees to get their perspective on the quality and effectiveness of the management team.
• Your attorney can help you understand the roles and responsibilities of the key executives as described in the FDD.

Explanation

This risk was not identified in the FDD package. Choice Hotels International, Inc. is a publicly-traded company, not one owned by a private equity firm. Private equity ownership can sometimes introduce risks related to short-term profit motives, which may not always align with the long-term health of the franchise system or the individual success of franchisees.

Potential Mitigations

• Understanding the franchisor's ownership structure, as disclosed in Item 1, is a critical step your attorney can assist with.
• A business advisor can help research the reputation and track record of any parent company or major shareholder.
• Discussing any changes in franchisor philosophy or support with long-term franchisees can provide valuable insight.

Explanation

This risk was not identified. Choice Hotels International, Inc. is disclosed as the franchisor, and its audited financial statements are provided. In situations where a franchise is offered by a subsidiary, the financial health of a parent company can be crucial, especially if the parent guarantees the subsidiary's obligations. A lack of transparency about a parent entity can obscure a full understanding of the franchise system's financial backing.

Potential Mitigations

• An attorney should always verify the corporate structure disclosed in Item 1 and ensure all required parent and affiliate disclosures are present.
• If a parent company guarantee is mentioned, your attorney should ensure it is included as an exhibit and that the parent's financials are provided if required.
• An accountant's review of the provided financials can help determine if the franchising entity appears to be self-sufficient.