Explanation

The financial statements for the guarantor, Red Roof Franchising, LLC (RRF), show profitability and positive net worth. However, for the year ended December 31, 2024, both total revenues and net income declined compared to the prior year. While the company appears financially stable currently, this negative trend could suggest future challenges in its ability to invest in the brand and support franchisees if it continues. Your accountant should analyze these trends carefully.

Potential Mitigations

• A franchise accountant should perform a thorough review of the audited financial statements, paying close attention to the footnotes and year-over-year trends in revenue and profitability.
• Analyzing the statement of cash flows with your accountant is important to understand how the company generates and uses its cash.
• Engaging a business advisor can help you assess if the noted financial trends might impact the level of support you can expect to receive.

Explanation

Item 20 data reveals potential stability concerns. From 2022 to 2023, there were five franchise terminations in a system that grew from 18 to 25 outlets, a notable rate. Additionally, in 2024, five affiliate-owned outlets ceased operations. While franchise terminations were zero in 2024, the prior terminations and recent affiliate closures could indicate challenges with unit-level profitability or franchisee satisfaction, posing a risk to your potential success within the system.

Potential Mitigations

• It is crucial to contact a significant number of current and former franchisees from the lists in Exhibit D to discuss their experiences and reasons for leaving.
• Your accountant can help you analyze the turnover rates relative to system growth to better understand the potential volatility.
• Discussing the specific reasons for the affiliate-owned closures with the franchisor could provide valuable insight into operational challenges.

Explanation

The system has experienced very rapid growth, expanding from 18 to 45 franchised outlets between the start of 2023 and the end of 2024. While growth can be positive, such a rapid expansion may strain the franchisor's resources. This could potentially affect the quality and availability of essential support services, including training, site selection assistance, and operational guidance, which are critical for new franchisees.

Potential Mitigations

• In your discussions with current franchisees, specifically inquire about the quality and responsiveness of the support they have received recently.
• Questioning the franchisor about their plans to scale support infrastructure to match the rapid unit growth is a prudent step.
• A business advisor can help you evaluate whether the franchisor's management team and support systems appear adequate for the system's current size.

Explanation

HomeTowne Studios, LLC (HTS) began franchising in 2018, making it a relatively young franchise system. While it is affiliated with the established Red Roof brand, the HomeTowne Studios concept itself has a shorter track record. Investing in a newer system carries inherent risks, such as an unproven long-term business model, evolving operational standards, and limited brand recognition compared to more mature competitors, which could impact your ramp-up period and overall performance.

Potential Mitigations

• Engaging a business advisor to perform deep due diligence on the brand's specific market niche and competitive positioning is recommended.
• It is important to speak with the earliest franchisees in the system to understand its evolution and the franchisor's performance over time.
• Your accountant should carefully model a conservative ramp-up period for revenue, given the system's relative newness.

Explanation

Item 1 discloses a complex ownership structure where the ultimate parent is WRRH LP, a partnership. While not explicitly identified as a traditional private equity firm, this type of ownership structure can sometimes prioritize investor returns over the long-term health of the franchise system. This may lead to decisions focused on short-term profitability, such as increasing fees or reducing support, which could potentially conflict with your interests as a franchisee.

Potential Mitigations

• It is advisable to research the parent entities with your business advisor to understand their typical investment strategies and history with other brands.
• Discuss with current franchisees whether they have observed any significant changes in franchisor strategy or support levels.
• Your attorney should review the assignment clauses in the Franchise Agreement to understand your rights if the system is sold.