Explanation

The franchisor, Hyatt Franchising, L.L.C. (Hyatt), is a subsidiary of the much larger Hyatt Hotels Corporation, which provides a full Guarantee of Performance. The parent company's audited financials show it is a large, profitable enterprise. While the parent's auditors noted a goodwill impairment charge in one division, this does not appear to indicate systemic instability, and the parent's guarantee significantly mitigates the financial risk of the franchisor entity.

Potential Mitigations

• Your accountant should review the parent company's audited financial statements and the franchisor's balance sheet to assess overall financial health.
• A franchise attorney should analyze the terms of the parent company's Guarantee of Performance to confirm its strength and your rights under it.
• Discuss the franchisor's financial stability and the parent's commitment to the new brand with your business advisor.

Explanation

This risk was not identified in the FDD Package. Item 20 data tables show no terminations, non-renewals, or other cessations because this is a new franchise system with no operating history. While the lack of history is its own risk, high turnover specifically is not a present factor. Assessing franchisee turnover is critical for established systems as it can indicate franchisee dissatisfaction or lack of profitability.

Potential Mitigations

• For any established franchise, have your accountant calculate the effective turnover rate from Item 20 and compare it to industry averages.
• It is crucial to contact former franchisees listed in Item 20 to understand why they left the system; your attorney can help prepare questions.
• A business advisor can help you assess whether the franchisor's explanations for any high turnover are credible.

Explanation

Item 20 projects ten new franchised outlets opening in the next fiscal year, starting from a base of zero. While technically a very high growth rate, the absolute number is small. The franchisor is part of the large, experienced Hyatt organization, which has substantial resources to support this initial launch phase. Therefore, the risk of support infrastructure being overwhelmed, which is typical in rapid growth scenarios, appears low in this context.

Potential Mitigations

• A business advisor can help you evaluate if the franchisor's support systems are adequate for its growth plans.
• In discussions with the franchisor, you should inquire about their specific plans for scaling support staff and resources.
• Your attorney should review the franchisor's support obligations outlined in Item 11 to understand their commitments.

Explanation

This risk was not identified in the FDD Package. The franchise is for an upper-midscale, select-service hotel, a well-established and long-standing segment of the lodging industry. It is not based on a new, untested, or trendy concept that might quickly lose consumer interest. Therefore, the risk of the business being a short-lived fad is considered very low.

Potential Mitigations

• When evaluating any franchise, your business advisor should help you assess the long-term market demand for its products or services.
• Consider the business model's resilience to economic shifts and changing consumer tastes with your financial advisor.
• Your attorney can help review Item 1 and Item 11 for information about the franchisor's history and plans for innovation.

Explanation

This risk was not identified in the FDD Package. Item 2 details the business experience of the franchisor's management team. The executives listed are long-time leaders within the Hyatt parent organization, possessing extensive experience in hotel operations, global development, and franchising specifically. The management team appears to be highly experienced in the relevant industry and in managing franchise systems.

Potential Mitigations

• In any FDD, it is vital to have a business advisor help you scrutinize the backgrounds of the key executives listed in Item 2.
• You should always ask current franchisees about their perception of the management team's competence and support.
• An attorney can help investigate if there has been recent, high turnover in key management positions, which could be a red flag.

Explanation

This risk was not identified in the FDD Package. Item 1 discloses that the franchisor's ultimate parent is Hyatt Hotels Corporation, which is a publicly-traded company, not a private equity firm. Therefore, the specific risks associated with a private equity ownership model, such as a focus on short-term returns over long-term system health, do not apply here.

Potential Mitigations

• With any franchise, a business advisor can help you research the ownership structure disclosed in Item 1.
• If a franchisor is owned by a private equity firm, it is crucial to investigate that firm's history with other franchise brands.
• Your attorney should review the assignment clause in the Franchise Agreement to understand how easily the system can be sold.

Explanation

This risk was not identified in the FDD Package. Item 1 clearly identifies Hyatt Hotels Corporation as the parent company of the franchisor. Item 21 and Exhibit A-1 provide the parent's audited financial statements, and a full Guarantee of Performance from the parent is also included as an exhibit. The relationship and financial backing are transparently disclosed.

Potential Mitigations

• Your accountant should always verify whether the franchisor is a subsidiary and assess if the parent's financials should have been included per FTC rules.
• An attorney can help determine if a parental guarantee is offered and if its terms provide meaningful protection.
• If a parent company is not disclosed, consider it a potential red flag and discuss the implications with your franchise attorney.

Explanation

This risk was not identified in the FDD Package. Item 1 states clearly, "We have no predecessors." The Hyatt Select brand is being launched as a new franchise system by an existing, well-established company. As there are no predecessors, there is no risk of inheriting historical problems, undisclosed liabilities, or a negative track record from a prior entity.

Potential Mitigations

• Your attorney should always carefully review Item 1 for any mention of predecessors.
• If a predecessor is identified, a business advisor can help you conduct independent research into that entity's history.
• Speaking with long-term franchisees who operated under a predecessor is essential for due diligence.

Explanation

Item 3 discloses one recent litigation where the franchisor sued a franchisee for unpaid royalty fees. This appears to be a standard collection action and does not represent a pattern of litigation initiated by franchisees alleging fraud or misrepresentation. The disclosure does not indicate systemic issues or a history of significant legal disputes with the franchisee network, presenting a low risk in this area.

Potential Mitigations

• A franchise attorney should always review the nature and frequency of all litigation disclosed in Item 3.
• A pattern of lawsuits filed by franchisees alleging fraud or by the franchisor for routine matters can be a significant red flag requiring discussion with legal counsel.
• Your attorney can help you understand the difference between routine collection lawsuits and more concerning legal disputes.