Explanation

The franchisor's parent, Wyndham Hotels & Resorts, Inc. (WHR), appears financially stable based on its audited financial statements, and it guarantees HJI's performance. However, the Howard Johnson system itself is shrinking, showing a net loss of outlets for the past three consecutive years according to Item 20 data. This decline could suggest potential challenges with brand competitiveness or franchisee satisfaction, despite the parent company's overall strength.

Potential Mitigations

• Your accountant should review the consolidated financial statements in Exhibit D to assess the financial health of the guarantor, WHR.
• A business advisor can help you analyze the Item 20 data to understand the trend of system shrinkage and its potential market implications.
• Discuss the specific reasons for the brand's declining unit count with the franchisor and existing franchisees.

Explanation

This specific risk was not identified in the FDD package. Rapid growth can strain a franchisor's ability to provide adequate support. Evaluating whether a franchisor has the infrastructure and financial resources to keep pace with its expansion is a key piece of due diligence.

Potential Mitigations

• Your accountant can review the franchisor's financial statements to assess if they have the capital to support the existing system and any growth.
• It is wise to ask current franchisees about their perception of the quality and timeliness of the support they receive from the franchisor.
• A business advisor can help you evaluate the ratio of corporate support staff to the number of franchised units.

Explanation

This risk was not identified in the FDD package, as Howard Johnson International, Inc. (HJI) and its parent company, Wyndham, have been franchising for many years. For new franchise systems, a lack of a proven track record, limited brand recognition, and inexperienced management can pose significant risks to a franchisee's investment.

Potential Mitigations

• When evaluating any franchise, your attorney should help you scrutinize the business experience of the management team outlined in Item 2.
• For a new system, an accountant should carefully review the financial statements in Item 21 for signs of under-capitalization.
• A business advisor can help you assess whether a new concept has long-term market viability or is a passing trend.

Explanation

This risk was not identified in the FDD package. Howard Johnson is a long-established brand in the hospitality industry. For newer concepts, there is a risk that the business is based on a temporary trend, which could fade and leave you with a long-term contractual obligation for an unpopular business.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term consumer demand for any franchise product or service.
• Review Item 11 disclosures on research and development to see if a franchisor has concrete plans for innovation and adaptation.
• Your financial advisor can help you model the business's resilience to shifts in consumer tastes and economic downturns.

Explanation

This risk was not identified in the FDD package. The executives detailed in Item 2 appear to have extensive experience within the hospitality industry and with the parent company, Wyndham Hotels & Resorts. Inexperienced management can be a major risk, as it may lead to poor strategic decisions and inadequate support for franchisees.

Potential Mitigations

• When evaluating any FDD, it is important to have your attorney review the management biographies in Item 2.
• Speaking with current franchisees can provide valuable insight into their direct experiences with the franchisor's management team.
• A business advisor can help you assess whether the management team's experience is relevant to both the industry and to managing a franchise system.

Explanation

This risk was not identified in the FDD package. The franchisor is a publicly-traded company, not one owned by a private equity firm. Private equity ownership can introduce risks related to prioritizing short-term returns over the long-term health of the brand, which might manifest as reduced support or increased fees.

Potential Mitigations

• If a franchisor is PE-owned, your business advisor can help you research the firm’s reputation and track record with other franchise brands.
• Your attorney should analyze the franchisor's right to assign the franchise agreement, as this is common with PE-owned systems.
• In discussions with current franchisees, you should ask about any changes in operations or support since a PE acquisition.

Explanation

This risk was not identified in the FDD package. The franchisor, Howard Johnson International, Inc. (HJI), clearly discloses its parent, Wyndham Hotel Group, LLC, and ultimate parent, Wyndham Hotels & Resorts, Inc. (WHR). Further, WHR's audited financial statements and a performance guaranty are provided, offering transparency into the financial backing of the system.

Potential Mitigations

• An attorney should always verify that the franchisor has disclosed all required parent and affiliate companies in Item 1.
• If a parent company provides a performance guarantee, your accountant should ensure the parent's financial statements are included and reviewed.
• Understanding the complete corporate structure is essential for assessing the true financial stability and resources behind a franchise brand.

Explanation

This risk was not identified in the FDD package. The document properly discloses the franchisor's history and its relationship with its parent company, Wyndham. In some cases, franchisors may have a complex history involving predecessors, and a failure to fully disclose this history can obscure past issues like litigation or high franchisee turnover.

Potential Mitigations

• A franchise attorney can help you review Item 1 for any mention of predecessors and cross-reference with Items 3 and 4 for related litigation or bankruptcy.
• If a system was recently acquired from a predecessor, your business advisor can help you research the predecessor's reputation.
• It is always a good practice to ask long-term franchisees about their experiences under any previous ownership.