Explanation

The franchisor’s audited financial statements in Exhibit D reveal a history of net losses, with a profit only in the most recent year. The auditor's report highlights an "Emphasis of Matter" regarding the company's significant and fundamental reliance on related-party transactions for services and branding. This financial structure may indicate a dependency on its affiliates, which could pose a risk to its long-term stability and ability to support you.

Potential Mitigations

• Having an accountant analyze the franchisor’s financial statements, including all footnotes on related-party transactions, is crucial to assess its true operational health.
• It is important to discuss with a franchise attorney the implications of the complex affiliate structure on the franchisor’s obligations to you.
• A financial advisor should help you evaluate the risk that the franchisor’s historical financial performance poses to your long-term investment.

Explanation

Item 20 data reveals a significant number of franchisees ceasing operations for "other reasons" over the past two years, representing a potentially high turnover rate. In 2024 alone, 10 out of 104 hotels that started the year ceased operations, and 9 were transferred. This level of churn could be an indicator of systemic issues, such as franchisee dissatisfaction or lack of profitability, posing a substantial risk to your potential success within the system.

Potential Mitigations

• It is critical to contact a significant number of former franchisees from the list in Exhibit F to understand exactly why they left the system.
• Your franchise attorney should help you formulate specific questions for the franchisor regarding the high number of cessations and transfers.
• A business advisor can help you assess whether this turnover rate is higher than industry averages for similar hotel brands.

Explanation

The data in Item 20 indicates a rapid strategic shift from a company-owned model to a franchise model, including the sale of many corporate stores to franchisees. The franchised unit count is growing while the company-owned count is shrinking significantly. Such rapid change can strain the franchisor's ability to provide adequate training, site support, and operational assistance to all its new franchisees, which could impact your business.

Potential Mitigations

• Inquiring with new franchisees about the quality and timeliness of the support they received during their opening process is advisable.
• Your business advisor can help you question the franchisor about their plans and capacity to scale support infrastructure to handle this rapid growth.
• Reviewing the franchisor's financial statements with an accountant can help determine if they are investing sufficiently in franchisee support systems.

Explanation

As disclosed in Item 1, the franchisor, ESH Strategies Franchise LLC (ESH), is part of a complex ownership structure ultimately controlled by affiliates of major private equity firms, The Blackstone Group and Starwood Capital Group. This type of ownership may create pressure to prioritize short-term investor returns, which could potentially lead to decisions about fees, support levels, or system changes that may not align with your long-term interests as a franchisee.

Potential Mitigations

• It is important to discuss with your franchise attorney the implications of the franchisor's right to sell the system, which is common with private equity ownership.
• A business advisor can help you research the ownership firms' track record with other franchise systems.
• Inquiring with other franchisees about any significant changes in direction or support since the acquisition by these firms is recommended.

Explanation

Item 3 discloses that ESH and its affiliates are defendants in multiple pending, consolidated class action lawsuits. These suits allege violations of the Sherman Antitrust Act, claiming the use of a shared revenue management software resulted in artificially inflated guest room rates. Such litigation is a significant risk, as an unfavorable outcome could impact the system's business model and financial stability, and it may indicate systemic issues.

Potential Mitigations

• It is absolutely essential to discuss the nature and potential impact of the antitrust litigation disclosed in Item 3 with your franchise attorney.
• Your attorney can help you research the current status of these cases to understand the potential risks to the franchisor and the system.
• A business advisor should help you consider the implications if the franchisor is forced to change its revenue management practices due to this litigation.