Explanation

This risk was not identified. The FDD provides audited financial statements for the parent company, Hyatt Hotels Corporation, which also provides an unconditional performance guarantee. The financials show a very large, profitable, and stable company. A franchisor's financial health is critical as it ensures they can support the brand and franchisees long-term, and an unstable franchisor might not be able to fulfill its obligations or invest in the system.

Potential Mitigations

• Even with strong financials, having your accountant review the statements, including footnotes and the independent auditor's report, is a prudent step.
• Your business advisor can help you assess the overall health of the brand and its parent company within the wider hospitality market.
• An attorney should confirm the enforceability and terms of the parent company's performance guarantee.

Explanation

High franchisee turnover was not identified. Item 20 data reveals a low number of terminations and no non-renewals or other cessations of operation over the past three years, relative to the system's size. Low turnover can suggest franchisee satisfaction and system viability. High turnover, conversely, can signal underlying problems with profitability, support, or the business model itself, representing a significant risk to prospective franchisees.

Potential Mitigations

• Even with low reported turnover, contacting current and former franchisees from the lists in Item 20 is a vital part of due diligence.
• A discussion with your business advisor can help contextualize the turnover rates against industry benchmarks.
• Your attorney can help you formulate insightful questions for former franchisees to understand their reasons for leaving the system.

Explanation

The risk of dangerously rapid growth was not identified. Item 20 data shows steady and managed system growth, which appears to be well within the capacity of a large, well-capitalized organization like Hyatt to support. While rapid expansion can sometimes stretch a franchisor's support resources thin, potentially harming franchisee service and quality control, the growth rate disclosed here does not suggest this is a current issue for this system.

Potential Mitigations

• Engaging a business advisor to evaluate the franchisor's support infrastructure in relation to its development pipeline is recommended.
• When speaking with franchisees, it is useful to ask about the quality and timeliness of support, especially in regions with recent growth.
• Your accountant can review the franchisor's financial statements to assess if they are allocating sufficient resources to support functions.

Explanation

This risk is not applicable. Item 1 and Item 20 clearly show that Hyatt House Franchising, L.L.C. (Hyatt House LLC) is part of a mature and well-established franchise system with a long operational history and over 100 existing hotels. Investing in a new or unproven system carries higher risks due to the lack of a track record and minimal brand recognition, but those concerns are not present here.

Potential Mitigations

• While the system is mature, a business advisor can still help you analyze its current market position and growth trajectory.
• It is still valuable to have your attorney review the history as described in Item 1 to understand the brand's evolution.
• Even with established brands, speaking with a diverse set of franchisees about their experiences provides critical insight.

Explanation

This franchise operates in the upscale, extended-stay hotel sector, which is a well-established and durable segment of the lodging industry, not a fad. A fad business, one tied to a fleeting trend, carries the risk of declining consumer interest that could jeopardize your long-term investment. This business model, however, is based on sustained demand from travelers like business professionals and families, indicating long-term viability.

Potential Mitigations

• A business advisor can help you conduct independent market research to confirm sustained demand for this type of lodging in your specific area.
• Even for established industries, your financial advisor should help you assess the business's resilience to economic cycles.
• Review the franchisor's innovation plans in Item 11 with a business advisor to gauge their strategy for staying current.

Explanation

This risk was not identified. The franchisor's management team, as described in Item 2, possesses extensive and long-term experience in the global hotel and hospitality industry. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions and inadequate franchisee support. However, the executive team detailed in the FDD has a strong and relevant track record, suggesting a high capacity to manage the franchise system effectively.

Potential Mitigations

• Although management is experienced, you should still discuss the franchisor's vision and strategy with them directly if possible.
• A business advisor can help you research the public reputation and past performance of the key executives listed.
• In your discussions with current franchisees, ask about their direct experiences and the quality of support from the corporate team.

Explanation

This risk is not applicable, as the franchisor is a subsidiary of Hyatt Hotels Corporation, a publicly traded company, not a private equity firm. Ownership by a private equity firm can sometimes introduce risks related to short-term profit motives that may not align with the long-term health of franchisees. This particular ownership structure does not present those specific risks.

Potential Mitigations

• Your attorney should still review the corporate structure in Item 1 to confirm the ownership and identify any major stakeholders.
• An accountant can analyze the public filings of the parent company to understand its financial priorities and health.
• A business advisor can help you understand the strategic direction of the public parent company and how it might impact franchisees.

Explanation

This risk is not present. Item 1 of the FDD fully discloses the parent company structure, and Item 21 provides the parent's audited financial statements along with an unconditional guarantee of performance. Proper disclosure of parent companies is important because it provides a complete picture of the financial strength and resources backing the franchise system. The disclosures here appear to be comprehensive and transparent.

Potential Mitigations

• An attorney should review the ownership structure disclosed in Item 1 and the terms of the parent guarantee in Exhibit A-1.
• Your accountant should review the parent company's financial statements to confirm its ability to back the guarantee.
• It is wise to verify with your attorney that all required entities have been properly disclosed according to franchise law.

Explanation

No significant issues with predecessor history were identified. Item 1 describes the franchisor's history, including its evolution from the Summerfield Suites brand. A review of Items 3 and 4 reveals no undisclosed or concerning litigation or bankruptcies related to these predecessors. Understanding a franchisor's lineage is important as it can reveal inherited issues, but in this case, the history appears straightforward and without notable problems.

Potential Mitigations

• A thorough review of the predecessor history in Item 1 with your attorney is still a recommended step in due diligence.
• When speaking with long-term franchisees, asking about their experience during any brand transitions can provide useful context.
• Your business advisor can help research the public history of any predecessor brands for a more complete picture.

Explanation

A pattern of litigation against the franchisor was not identified. Item 3 discloses only a single routine collection case brought by the franchisor against a franchisee in the last fiscal year for unpaid fees. A high volume of lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems. That does not appear to be the case here.

Potential Mitigations

• Your attorney should still review the details of any disclosed litigation to understand the context and outcome.
• A business advisor can help you research public records for any litigation not required to be disclosed in the FDD.
• It is always a good practice to ask current franchisees about their awareness of any disputes within the system.