Explanation

This risk was not identified. The audited financial statements in Exhibit C show Hilton Franchise Holding LLC (Hilton LLC) to be highly profitable with strong positive net worth and significant cash flow from operations. Financial instability risk generally matters because a weak franchisor may be unable to support its franchisees, invest in the brand, or even remain in business, jeopardizing your entire investment.

Potential Mitigations

• A franchise accountant should review the franchisor's financial statements, including all footnotes and the independent auditor's report.
• Ask your accountant to analyze the franchisor's balance sheet, income statement, and cash flow statement for any signs of financial weakness.
• Discuss the franchisor's financial stability and its ability to support the system with your business advisor.

Explanation

This risk was not identified. FDD Item 20 and Exhibit B report no terminations, non-renewals, or cessations of franchised outlets in the last three years. This is a positive indicator for system stability. Generally, high turnover can signal significant problems within a franchise system, such as franchisee unprofitability, dissatisfaction with support, or other systemic issues that could affect your business.

Potential Mitigations

• It is wise to contact a number of current and former franchisees from the lists in Item 20 to discuss their experiences.
• Engage your accountant to analyze the turnover rates presented in Item 20 over the past three years to spot any negative trends.
• During discussions with former franchisees, your attorney can help you formulate questions to understand their reasons for leaving the system.

Explanation

This risk was not identified. Item 20 data indicates that the LXR franchise system is very small and has not experienced rapid growth. This risk matters because very fast expansion can sometimes strain a franchisor's ability to provide adequate support, training, and quality control to all of its franchisees, potentially diluting the brand's value and negatively impacting your business operations.

Potential Mitigations

• A thorough review of Item 20 data with your business advisor can help assess if the system's growth is sustainable.
• Discuss the franchisor's infrastructure for support in relation to its growth rate with your attorney.
• Speaking with franchisees who joined at different stages of growth can provide insight into how support levels have changed over time.

Explanation

This risk does not appear to be present. The LXR concept, a collection of unique luxury hotels, operates within the established "soft brand" segment of the hotel industry, which caters to travelers seeking distinctive, high-end experiences. This is not a new or trendy concept with a high risk of being a short-lived fad.

Potential Mitigations

• Assessing the long-term market demand for the core product or service with your business advisor can help evaluate this risk.
• Researching the stability and history of the specific industry vertical could provide valuable context.
• Discussing the franchisor's plans for innovation and brand evolution with your attorney can reveal their long-term strategy.

Explanation

This risk was not identified. Item 2 shows that the management team consists of seasoned executives from Hilton Worldwide, a major global hospitality company with extensive experience in both hotel operations and franchising. Inexperienced leadership can pose a risk to a franchise system, potentially leading to poor strategic decisions and inadequate support for franchisees, but that does not appear to be the case here.

Potential Mitigations

• A review of the executive biographies in Item 2 with your business advisor can help gauge the depth of relevant industry and franchising experience.
• Inquiring about the management team's track record with other franchise systems is a worthwhile due diligence step.
• Your attorney can help you ask current franchisees about their direct experiences with the franchisor's leadership team.

Explanation

This risk is not present. FDD Item 1 indicates that the ultimate parent company, Hilton Worldwide Holdings Inc., is a publicly traded corporation (NYSE: HLT), not a private equity firm. While private equity ownership can sometimes introduce risks related to short-term profit motives over long-term brand health, this specific risk is not applicable to the current ownership structure.

Potential Mitigations

• Understanding the franchisor's ownership structure in Item 1 is a key first step your attorney should take.
• If private equity is involved, discussing the potential impacts on long-term brand strategy with a business advisor is crucial.
• Your attorney can help investigate a private equity firm's history and reputation with other franchise brands.

Explanation

This risk is not present. Item 1 clearly discloses the parentage, with Hilton Franchise Holding LLC (Hilton LLC) being a subsidiary of Hilton Domestic Operating Company Inc., which is a subsidiary of the publicly-traded Hilton Worldwide Holdings Inc. The FDD provides audited financial statements for the franchisor entity itself. There appears to be adequate disclosure of the corporate structure.

Potential Mitigations

• Your attorney should verify if the franchisor is a subsidiary and, if so, whether the parent company guarantees its obligations.
• If a parent guarantee is provided, an accountant should review the parent company's financial statements.
• A business advisor can help assess the potential risks if a thinly capitalized subsidiary is not backstopped by a financially strong parent.

Explanation

This risk was not identified. FDD Item 1 indicates that Hilton Franchise Holding LLC (Hilton LLC) has no predecessors for the LXR brand. A lack of transparent predecessor history can sometimes obscure past issues like litigation or high franchisee turnover, but that does not appear to be a concern here as the brand's franchising history is presented as starting with the current entity.

Potential Mitigations

• Reviewing Item 1 of the FDD with your attorney is the first step to understanding the franchisor's history.
• If a predecessor is identified, your business advisor can help you research its history and reputation.
• It is useful to ask long-tenured franchisees about their experiences under any predecessor's management.