Explanation

The franchisor's audited financial statements in Exhibit C show significant revenues and operating income, with a positive member's equity of over $577 million in 2024. While the company made large distributions to its affiliates, the financials do not indicate instability or a going concern issue. The risk of the franchisor lacking financial ability to support the system appears low at this time.

Potential Mitigations

• A qualified franchise accountant should conduct a detailed review of the audited financial statements, including all footnotes and cash flow statements, to form an independent opinion on financial health.
• Engage your business advisor to discuss the franchisor's financial strategy, particularly regarding the large distributions to affiliates.
• Your accountant can help you assess the franchisor's balance sheet and its ability to fund future growth and support obligations.

Explanation

Based on the data in Item 20, the franchisee turnover rate appears to be relatively low. For 2024, the total number of terminations and other cessations was approximately 3.2% of the franchised hotels at the start of the year. While any exit is a concern, this figure does not suggest a systemic problem with franchisee failure or dissatisfaction at this time. However, the reasons for individual exits are not detailed.

Potential Mitigations

• It is crucial to contact a representative sample of former franchisees listed in Exhibit B to understand their reasons for leaving the system.
• Your accountant can help you analyze the three-year trend data in Item 20's tables for any signs of accelerating turnover.
• Engage a business advisor to compare these turnover rates against broader lodging industry benchmarks for a more complete perspective.

Explanation

This risk was not identified in the FDD package. The data in Item 20 does not show a rate of growth that appears unmanageable, and the financial statements in Item 21 indicate substantial resources. Uncontrolled growth can strain a franchisor's ability to provide franchisee support. It is a critical factor to consider, as it can directly impact the quality of training, site selection assistance, and ongoing operational guidance you receive.

Potential Mitigations

• In discussions with the franchisor, you should inquire about their plans for scaling support infrastructure to match unit growth.
• A business advisor can help you assess if the franchisor's staffing and systems are adequate for the current and projected number of hotels.
• Contacting a sample of newer franchisees can provide insight into the current quality and responsiveness of franchisor support.

Explanation

This risk is not present. The FDD package indicates Hilton is a large, mature, and globally recognized brand with decades of operating and franchising experience. Item 1 details a long corporate history, and Item 2 shows an executive team with extensive experience in the hospitality industry. Therefore, the risks associated with an unproven system or inexperienced management do not appear to apply here.

Potential Mitigations

• A business advisor should still help you evaluate the brand's current market position and competitive advantages.
• When speaking with current franchisees, you can ask about the effectiveness of the current management team and recent strategic initiatives.
• Your attorney should review the complete corporate history in Item 1 to ensure you understand the current ownership structure.

Explanation

This risk is not present. Hilton is a globally established hotel brand and a leader in the lodging industry, not a business based on a fleeting trend. The risk of the business being a short-term fad is extremely low. A fad business model presents a significant risk because its long-term consumer demand is uncertain, potentially leaving you with a worthless business after the trend fades, even though your contractual obligations remain.

Potential Mitigations

• A business advisor can help you analyze the long-term competitive landscape of the upper upscale hotel market.
• It is wise to review the franchisor's stated plans for future innovation and brand development in Item 11.
• You should work with a financial advisor to develop a business plan based on sustained, long-term market demand, not short-term trends.

Explanation

This risk was not identified in the FDD. Item 2 presents a large management team with, in most cases, extensive and long-term experience within Hilton or the broader hospitality industry. The leadership appears to have significant expertise in both managing hotels and running a large-scale franchise system. Inexperienced management is a key risk factor as it can lead to poor strategic decisions and inadequate franchisee support.

Potential Mitigations

• It is still prudent to conduct your own research on the background and reputation of key executives.
• A business advisor can help you assess the leadership team's recent performance and strategic direction for the brand.
• When speaking with franchisees, ask about their direct experiences and the quality of support received from the current leadership team.

Explanation

This risk was not identified. Item 1 of the FDD clearly discloses the parent companies, Hilton Domestic Operating Company Inc. and Hilton Worldwide Holdings Inc. The financial statements provided in Exhibit C are for the franchisor entity, Hilton Franchise Holding LLC. While parent company financials are not included, the franchisor entity itself appears to be financially sound, and there is no parent guarantee mentioned that would necessitate their inclusion.

Potential Mitigations

• Your attorney can review the corporate structure outlined in Item 1 to confirm the relationships between the franchisor and its parent entities.
• An accountant should verify that the provided financial statements comply with all disclosure requirements for the franchising entity.
• It is good practice to ask the franchisor to clarify the nature and extent of financial and operational support provided by the parent companies.

Explanation

This risk is not present. Item 1 provides a detailed history of the franchisor and its various predecessors, such as Hilton Inns, Inc. and Park Hotels & Resorts, Inc. The document also provides relevant litigation and bankruptcy history for these predecessors in Items 3 and 4. A failure to disclose such history would be a major red flag, as it could hide systemic issues inherited by the current franchisor.

Potential Mitigations

• Your attorney should carefully review all disclosed information regarding predecessors to ensure you understand the full history of the brand.
• When conducting due diligence, asking long-tenured franchisees about their experiences under prior ownership can provide valuable context.
• A business advisor can help you research the public history of any predecessor entities for additional insight.