Explanation

The financial statements for Holiday Hospitality Franchising, LLC (Holiday) and its parent, Six Continents Hotels, Inc., do not indicate financial instability. Both entities show significant revenue and positive net income, and are part of the large, publicly-traded InterContinental Hotels Group (IHG). The financials are audited by a major accounting firm and present a stable financial position, suggesting the franchisor has the resources to support the system and its franchisees.

Potential Mitigations

• A review of the financials in Exhibit F1 and F2 with your accountant is advisable to confirm the franchisor's financial health.
• Your attorney can help you understand the relationship between Holiday, its parent company, and any financial guarantees that may exist.
• Discuss the franchisor's reinvestment strategies and support budget with your business advisor to gauge their commitment to the system.

Explanation

Item 20 data for the last three years does not indicate high franchisee turnover. For 2024, the combined rate of terminations and non-renewals was approximately 3.1% of the total outlets at the start of the year. This low rate suggests a relatively stable franchise system and may indicate a general level of franchisee satisfaction. A stable system can be a positive indicator for new investors.

Potential Mitigations

• Contacting a diverse sample of current and former franchisees from the lists in Item 20 is crucial to verify the reasons for any departures.
• A franchise attorney can help you formulate insightful questions to ask former franchisees about their reasons for leaving the system.
• It is wise to have your accountant help analyze the multi-year trends in the Item 20 tables to confirm system stability.

Explanation

This risk was not identified in the FDD package. While the system is large, the rate of new openings disclosed in Item 20 appears manageable relative to the system's size and resources. Rapid growth can sometimes strain a franchisor's ability to provide adequate support, training, and quality control to all units, potentially diluting brand value and franchisee support.

Potential Mitigations

• Engage a business advisor to assess if the franchisor's support infrastructure, as described in Item 11, can sustain its growth rate.
• Speaking with franchisees who have opened recently is a good way to gauge the current quality of pre-opening and ongoing support.
• Your attorney can help you understand the franchisor's contractual obligations for support regardless of system size.

Explanation

This risk is not present. Holiday and its parent company, IHG, are one of the world's largest and most experienced hotel franchisors, with a history dating back to 1953. The FDD reflects a mature, well-established system with extensive brand recognition and operational history. An unproven system would present higher risks related to brand value, support quality, and long-term viability.

Potential Mitigations

• A review of Item 1 and Item 2 with your business advisor can confirm the extensive history and experience of the franchisor's management team.
• Comparing the system's size and age in Item 20 to other hotel franchises can provide context on its maturity and market position.
• Your attorney can advise on the benefits and drawbacks of joining a mature system versus an emerging one.

Explanation

This risk is not present. The Holiday Inn brand is a long-established, globally recognized brand in the hotel industry, which has demonstrated sustained consumer demand over many decades. A 'fad' business, which relies on a temporary trend, presents a significant risk that demand could disappear, jeopardizing your long-term investment even though your contractual obligations would remain.

Potential Mitigations

• Your business advisor can help you independently research the long-term economic trends and consumer demand in the hotel industry.
• Engaging a business advisor to evaluate the brand's market position and competitive advantages is a prudent step.
• A discussion with your attorney can clarify the long-term nature of your contractual obligations regardless of market shifts.

Explanation

This risk was not identified in the FDD package. Item 2 discloses the business experience of the principal officers and directors of the franchisor. The management team consists of individuals with extensive, multi-year careers within Holiday, its parent IHG, and the broader hospitality industry. Inexperienced management can pose a significant risk, as it may lead to poor strategic decisions and inadequate support for franchisees.

Potential Mitigations

• A thorough review of the backgrounds of key executives in Item 2 with your business advisor is a good practice to confirm their industry expertise.
• Franchisees on the Item 20 list can provide direct feedback on their interactions with and the effectiveness of the current management team.
• An attorney can help you assess how management's experience might influence the franchisor's exercise of its contractual discretion.

Explanation

This risk was not identified in the FDD package. While Holiday's ultimate parent, InterContinental Hotels Group PLC, is a publicly-traded company, it is not described as being owned by a private equity firm. Private equity ownership can sometimes introduce a focus on short-term returns, which may lead to increased fees or reduced franchisee support to maximize profits before a planned exit or sale of the franchise system.

Potential Mitigations

• Your attorney can help you research the current ownership structure of the franchisor's ultimate parent company.
• Understanding the franchisor's right to assign the franchise agreement, as outlined in Item 17, is crucial regardless of ownership structure.
• A business advisor can help you analyze the potential impact of any future sale of the franchise system on your investment.

Explanation

This risk is not present. Item 1 clearly identifies Holiday Hospitality Franchising, LLC's direct and ultimate parent companies. Further, Item 21 includes the audited financial statements for both Holiday and its direct parent, Six Continents Hotels, Inc. This provides a clear picture of the financial health of the entities directly involved in the franchise relationship, as required.

Potential Mitigations

• Having your accountant review the provided financials for both the franchisor and its parent is important to understand the complete financial picture.
• Your attorney can clarify the legal relationships and obligations between the parent, the franchisor, and you as the franchisee.
• It is wise to ask the franchisor to explain the roles and responsibilities of the different corporate entities with your business advisor present.

Explanation

This risk was not identified in the FDD package. Item 1 states Holiday has had no predecessor in the last ten years, though it details its own corporate history and name changes. This indicates the system's operational history, litigation, and financial data as presented in the FDD are directly attributable to the current franchisor entity, providing a clear historical picture. A predecessor with a negative history could introduce inherited problems into the system.

Potential Mitigations

• A careful review of Item 1 with your attorney can confirm the corporate lineage and lack of recent predecessors.
• Consulting a business advisor to research the brand's history can provide additional context on its stability and reputation.
• Asking long-term franchisees about the brand's history and evolution is a valuable due diligence step.