Explanation

This risk was not identified. The audited financial statements in Exhibit C show that Hilton Franchise Holding LLC (Hilton) is highly profitable, with strong positive net worth and significant cash flow. These are indicators of a financially stable franchisor capable of supporting the system. A prospective franchisee should still understand these statements, as they are a key indicator of the franchisor's health and ability to meet its obligations.

Potential Mitigations

• Engage an accountant to review the franchisor's financial statements for the past three years to confirm financial stability and identify any trends.
• A business advisor can help you assess whether the franchisor's financial strength aligns with its growth plans and support commitments.
• It is wise to have your attorney review any notes in the financial statements that may indicate guarantees or other contingencies.

Explanation

This risk was not identified. The data in Item 20's tables for both Hampton Inn and Hampton Inn & Suites shows exceptionally low turnover rates for 2024, with combined terminations, non-renewals, and other cessations accounting for less than 1% of the total system. This low rate generally suggests a high level of franchisee satisfaction and system stability. High turnover can be a major red flag indicating systemic issues.

Potential Mitigations

• Your business advisor should help you calculate the effective turnover rate from Item 20 data to confirm system stability.
• It is prudent to contact a broad sample of current and former franchisees listed in the FDD to discuss their experiences and reasons for staying or leaving.
• An attorney can help you formulate key questions to ask former franchisees regarding their departure from the system.

Explanation

This risk was not identified. The data in Item 20 shows very modest and controlled growth for a system of this size, with a net increase of only eight total units in 2024. This level of growth does not suggest the franchisor is expanding too quickly or is at risk of outstripping its ability to provide franchisee support. Rapid growth can sometimes strain a franchisor's support systems, impacting franchisees.

Potential Mitigations

• A business advisor can help you evaluate the franchisor's growth rate in the context of its size and the overall industry.
• During due diligence calls with current franchisees, you can inquire about the quality and timeliness of support services.
• Reviewing the franchisor's plans for future growth with your business advisor can help assess if support infrastructure is likely to keep pace.

Explanation

This risk was not identified. The Hampton by Hilton brand is part of a large, mature franchise system with a history dating back to 1983. Item 1 and Item 20 show a very large number of existing hotels and a long operational history. An unproven system carries higher risks, as its business model, brand recognition, and support structures have not been tested over time.

Potential Mitigations

• A thorough review of the franchisor's history in Item 1 with your attorney will help confirm its experience in the industry.
• With your business advisor, you can analyze the long-term data in Item 20 to understand the system's historical stability.
• Seeking input from long-term franchisees can provide valuable insight into the evolution and stability of the business model.

Explanation

This risk was not identified. The franchise is for the operation of a hotel, which is a well-established segment of the travel and hospitality industry. This business model is based on long-term consumer and business demand for lodging, not a short-term trend or fad. Investing in a fad business carries the risk that demand may disappear, leaving you with a worthless business and ongoing contractual obligations.

Potential Mitigations

• A business advisor can help you analyze the long-term market trends for the specific hotel segment in your target area.
• You should independently research the stability and outlook for the midscale hotel industry to confirm its long-term viability.
• Discussing the business's resilience to economic cycles with current franchisees can provide additional comfort.

Explanation

This risk was not identified. Item 2 of the FDD lists the franchisor's directors and officers, who possess extensive and long-term experience within Hilton and other major hospitality companies like Marriott and Starwood. The management team appears highly experienced in both the hotel industry and franchising. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions and inadequate franchisee support.

Potential Mitigations

• A business advisor can help you review the executive biographies in Item 2 to confirm their franchising and industry-specific experience.
• During conversations with franchisees, inquire about their perception of the management team's competence and leadership.
• You can independently research the public reputations of key executives to further assess their track records.

Explanation

This risk was not identified. Item 1 clearly discloses the franchisor's parent companies, Hilton Domestic Operating Company Inc. and Hilton Worldwide Holdings Inc. The FDD also provides detailed, audited financial statements for the franchisor entity itself. There is no indication of non-disclosure or an attempt to obscure the corporate structure. Failure to disclose a parent company can hide financial instability or other risks from a prospective franchisee.

Potential Mitigations

• A review of Item 1 and the corporate structure with your attorney will confirm that all relevant parent and affiliate entities are disclosed.
• Your accountant can verify that the provided financial statements are for the correct legal entity offering the franchise.
• If a parent guarantees obligations, ensure your attorney confirms that the parent's financial statements are included if legally required.

Explanation

This risk was not identified. Item 1 of the FDD clearly discloses predecessor entities, such as Promus Hotel Systems, Inc. A review of Items 3 and 4 does not reveal any significant undisclosed litigation or bankruptcy history related to these predecessors that would suggest inherited problems for the current system. A lack of transparency about predecessor history could hide systemic issues from the past.

Potential Mitigations

• Your attorney can review the predecessor disclosures in Items 1, 3, and 4 to ensure they appear complete and do not raise red flags.
• To gain more insight, you could speak with long-term franchisees who operated under a predecessor entity.
• A business advisor can help you research the history of predecessor companies for any publicly available information.

Explanation

While Item 3 discloses several pending industry-wide antitrust class actions and some settled individual disputes, it does not show a significant pattern of litigation initiated by franchisees alleging fraud or misrepresentation. For a system with thousands of units, the number of such specific actions is low. The disclosed cases primarily relate to broader industry practices or consumer-facing issues, rather than systemic problems in the franchise relationship itself. A pattern of fraud claims can be a major red flag.

Potential Mitigations

• Having your attorney review the nature and status of all litigation disclosed in Item 3 is a crucial step.
• It is prudent to discuss the franchisor's litigation history with current franchisees to understand their perspective.
• Your attorney can help assess whether the volume and type of litigation are typical for a system of this size and nature.