Explanation

This risk was not identified. The financial statements in Item 21, audited by Ernst & Young LLP, show Choice Hotels International, Inc. (Choice) to be a large, profitable, and financially stable public company. A franchisor's financial instability could otherwise jeopardize its ability to support its franchisees or invest in the brand, but that does not appear to be a concern here.

Potential Mitigations

• Your accountant should always review a franchisor's financial statements for signs of weakness, such as declining revenue or negative net worth.
• A business advisor can help you assess whether a franchisor has sufficient capital to support its stated growth and support plans.
• It is wise to have your attorney check for any state-required performance bonds if a franchisor's finances appear weak.

Explanation

This specific risk of high turnover was not identified for the new EVERHOME SUITES brand. Item 20 tables show no franchisee terminations, non-renewals, or other cessations to date. This is expected for a new system with very few operating units. However, a high turnover rate in a mature system can be a significant indicator of franchisee dissatisfaction or lack of profitability.

Potential Mitigations

• You should discuss the high volume of franchisor-initiated litigation against franchisees of its other brands, disclosed in Item 3, with your attorney.
• Engaging a business advisor to analyze the reasons for franchisee exits in a franchisor's more established brands can provide valuable insight.
• An accountant can help you calculate the true turnover rate for any franchise system by analyzing the data in the Item 20 tables.

Explanation

This risk was not identified. The extended-stay hotel concept is a well-established and long-standing segment of the lodging industry, not a temporary or novelty trend. Therefore, the business model is not considered to be based on a fad. A business based on a fad carries a high risk of failure once consumer interest declines.

Potential Mitigations

• A business advisor can help you research the long-term market trends for any industry you consider entering.
• It is wise to have your accountant analyze if a business's revenue model appears sustainable beyond current trends.
• Your attorney can help you understand your long-term obligations under the franchise agreement, which continue even if a business trend fades.

Explanation

This risk was not identified. The executive team at Choice, as detailed in Item 2, possesses extensive experience in the hotel and franchising industries. Inexperienced management can be a significant risk, potentially leading to poor strategic decisions and inadequate franchisee support. However, the leadership of this franchisor appears to be well-established and seasoned in its field.

Potential Mitigations

• You should always have your business advisor review the backgrounds of the key executives listed in Item 2.
• Interviewing existing franchisees about their perception of the management team's competence and support is a valuable due diligence step.
• Your attorney can help you understand how much operational authority rests with the key executives.

Explanation

This risk was not identified. Choice is a publicly-traded corporation, not owned by a private equity firm. Private equity ownership can sometimes introduce risks related to prioritizing short-term financial returns over the long-term health of the franchise system. This does not appear to be a factor in this offering.

Potential Mitigations

• Your attorney can help you investigate the ownership structure of any franchisor to understand who ultimately controls the company.
• A business advisor can help research the track record of a private equity owner with other franchise brands.
• It is wise to ask existing franchisees if they have observed any changes in franchisor behavior after a private equity acquisition.

Explanation

This risk was not identified. The FDD is for Choice Hotels International, Inc., which appears to be the ultimate parent entity. Its audited financial statements are included as required. There is no indication of an undisclosed parent company whose financials are necessary for a complete risk assessment. Withholding required parent financials can obscure the true stability of a franchise system.

Potential Mitigations

• Your accountant should verify if the entity providing the financial statements is the same entity signing the Franchise Agreement.
• It is prudent to have your attorney determine if a parent company guarantees the franchisor's obligations.
• A business advisor can help investigate the full corporate structure if a franchisor appears to be a subsidiary of a larger, undisclosed entity.

Explanation

This risk was not identified. The EVERHOME SUITES brand is new and does not have a disclosed predecessor history. For other franchises, a history of issues under a prior owner, such as high failure rates or litigation, could be a significant concern. That does not apply here, as Choice developed this brand internally.

Potential Mitigations

• Your attorney should always carefully review Item 1 of the FDD for any mention of predecessors.
• If a predecessor is identified, a business advisor can help you research that company's history and reputation.
• Asking long-term franchisees about their experience under any previous system owners is a valuable due diligence step.