Explanation

This risk was not identified in the FDD package. Item 20 data shows the franchise system has been shrinking, not growing rapidly, over the past three years. Rapid growth can strain a franchisor's ability to provide adequate support, so its absence can be a positive sign, but slow or negative growth presents its own challenges regarding brand momentum and market presence.

Potential Mitigations

• A business advisor can help you analyze the implications of the system's negative growth trend on brand recognition and market share.
• Discuss with your accountant how a shrinking system might affect the value and use of the advertising fund.
• When speaking with current franchisees, you can ask about their perception of the brand's momentum in the marketplace.

Explanation

This risk was not identified. FDD Item 1 indicates the franchisor, Hospitality International, Inc. (HII), has been in business and offering franchises for over 40 years, suggesting it is an established and proven system, not a new or unproven one. A long history can provide stability and brand recognition, though it does not guarantee future success or modern practices.

Potential Mitigations

• Engaging a business advisor to assess how an established brand is adapting to modern travel and hospitality trends is beneficial.
• It is important to discuss with your attorney whether the long-standing franchise agreement reflects current best practices.
• Verifying with current franchisees whether the franchisor's support and systems have remained relevant and effective over time is recommended.

Explanation

This risk was not identified. The franchise operates in the traditional hotel and lodging industry, which is a long-established market sector, not a business based on a recent or fleeting trend. The long-term viability of this industry is well-documented, though it is subject to economic cycles and evolving consumer preferences.

Potential Mitigations

• A business advisor can help you analyze the competitive landscape and long-term outlook for the budget hotel segment in your target market.
• Your accountant can assist in developing financial projections that account for the cyclical nature of the hospitality industry.
• Discuss with your attorney any unique local regulations that might affect a lodging business.

Explanation

This risk was not identified in the FDD. Item 2 details a management team with extensive and long-term experience in both the hospitality industry and franchising specifically. The key executives have been with the company or in similar roles at other major hotel franchise systems for many years, suggesting a stable and knowledgeable leadership team.

Potential Mitigations

• A business advisor can still be useful to discuss the current strategic direction of the experienced management team with you.
• When speaking with current franchisees, it can be helpful to ask about their direct interactions and the effectiveness of the leadership team.
• An attorney can review any recent changes in management to understand their potential impact on the franchise relationship.

Explanation

This risk was not identified. FDD Item 1 indicates that the franchisor is owned by its affiliate corporations, Red Carpet Inns International, Inc. and Southern Scottish Inns, Inc., rather than a private equity firm. This type of ownership structure may suggest a focus on long-term operational stability over short-term investor returns.

Potential Mitigations

• It is still valuable to have your attorney review the corporate structure and any inter-company agreements that could affect your franchise.
• Understanding the long-term goals of the corporate owners can be a useful discussion to have with a business advisor.
• Discuss with your accountant how the affiliate ownership structure, including royalty payments to parent companies, impacts the franchisor's financials.

Explanation

This risk was not identified. While Item 1 discloses a long and complex corporate history with name changes and asset acquisitions, there is no indication of undisclosed negative history, such as bankruptcies or significant litigation related to predecessors, that would suggest inherited systemic problems. The history appears to be part of the brand's long evolution.

Potential Mitigations

• Having an attorney review the complex corporate history outlined in Item 1 can provide additional context on the brand's evolution.
• When speaking with long-term franchisees, a business advisor can help you ask about their experiences through different ownership structures.
• An accountant's review of the historical financial data can shed light on performance through these corporate changes.

Explanation

This risk was not identified. Item 3 does not show a pattern of franchisee-initiated litigation against the franchisor for fraud or misrepresentation. However, there is a serious pending lawsuit alleging sex trafficking at a franchised property. While not a pattern, this single case presents a significant potential liability and reputational risk to the entire brand, which should be carefully considered.

Potential Mitigations

• Your attorney should be consulted to discuss the potential impact and liability implications of the pending litigation mentioned in Item 3.
• Engaging an insurance broker is crucial to ensure you have adequate coverage for third-party liability claims at your property.
• A business advisor can help you assess the potential reputational damage to the brand resulting from this type of lawsuit.