Explanation

This risk was not identified in the FDD package. High franchisee turnover, evidenced by numerous terminations, non-renewals, or closures in Item 20, can be a major red flag. It often suggests systemic issues like lack of profitability, poor franchisor support, or an unviable business model. Analyzing this data is crucial for assessing the long-term health and stability of the franchise system.

Potential Mitigations

• Even with low reported turnover, it is wise to contact a broad sample of current and former franchisees listed in Item 20 to discuss their experiences.
• An accountant can help you analyze the Item 20 tables to calculate the effective annual turnover rate for comparison with any available industry data.
• Your business advisor can help you formulate questions for the franchisor regarding the circumstances of any outlets that have left the system.

Explanation

The system experienced a 20% growth in unit count during 2023. While growth has since stabilized, rapid expansion can sometimes strain a franchisor's ability to provide adequate support and training to all locations. Coupled with the significant financial deficit noted in the parent company's balance sheet, this past growth could indicate a risk that support resources may be stretched thin.

Potential Mitigations

• Engaging a business advisor to question the franchisor about their infrastructure for supporting franchisees during and after growth phases is recommended.
• In discussions with current franchisees, specifically inquire about the consistency and quality of support they have received from the franchisor.
• Your accountant should review the franchisor's allocation of resources to franchisee support versus new franchise sales.

Explanation

This risk was not identified in the FDD. Margaritaville Hotels & Resorts, LLC (MHR) began franchising in 2019 and, with over 15 operating units and an experienced management team, it does not qualify as a new or unproven system. Investing in a new system with little operating history or brand recognition generally carries higher risks of failure and inadequate support, which does not appear to be the primary concern here.

Potential Mitigations

• A business advisor can still help you research the brand's history and its competitive position in the upscale hotel market.
• It is still prudent to have your accountant review the system's financial performance over the past several years for stability.
• Consulting with your attorney about the terms offered in the agreement is always a sound practice, regardless of system age.

Explanation

This risk was not identified. The Margaritaville brand, centered around the music and lifestyle of Jimmy Buffett, is a long-established and widely recognized hospitality and consumer brand. It is not considered a fad business, as it has demonstrated decades of sustained consumer interest and market presence. A fad business typically relies on a short-term trend, which is not characteristic of this offering.

Potential Mitigations

• A business advisor can help you analyze the long-term market trends in themed hospitality to confirm the brand's enduring appeal.
• Your financial advisor should still help you develop business plans based on conservative projections for your specific market.
• Speaking with long-standing franchisees about the brand's evolution and continued relevance is a valuable due diligence step.

Explanation

This risk was not identified in the FDD. Item 2 of the FDD shows that the franchisor's key management personnel possess extensive and long-term experience in the hospitality industry, often with many years at Margaritaville itself. Franchises with inexperienced leadership can pose a higher risk due to potential gaps in operational knowledge, support systems, and strategic direction, which does not appear to be the case here.

Potential Mitigations

• Even with an experienced team, it is beneficial to have a business advisor help you assess how their specific experience translates to supporting your hotel.
• When speaking to other franchisees, inquire about their direct experiences with the support and guidance provided by the management team.
• Your attorney can help you understand the contractual obligations the franchisor has for providing support, regardless of management experience.

Explanation

This risk was not identified. FDD Item 1 properly discloses the parent company, Margaritaville Holdings LLC, and Item 21 includes the parent's audited financial statements because it serves as the guarantor of the franchisor's obligations. This provides necessary transparency into the financial health of the ultimate controlling entity. Failure to disclose a parent company can obscure significant financial or operational risks.

Potential Mitigations

• Your accountant should always confirm that if a parent company is mentioned or provides a guarantee, its financial statements are included and reviewed.
• It is a good practice for your attorney to verify the corporate structure to ensure all relevant entities have been disclosed.
• A business advisor can help you understand the relationships between the franchisor, parent, and other affiliated companies.

Explanation

This risk was not identified in the FDD. Item 1 states that the franchisor, Margaritaville Hotels & Resorts, LLC, has no predecessors. A predecessor is a company from which the franchisor acquired a major portion of its assets. Failing to disclose a predecessor or its history could hide important information about past business failures, litigation, or franchisee turnover, but that risk is not present here.

Potential Mitigations

• As a standard part of due diligence, your attorney should always verify the information in Item 1 regarding predecessors.
• If a predecessor were disclosed, a business advisor could assist you in researching its history and reputation.
• Even without a predecessor, it's wise to ask long-tenured employees or franchisees about the history of the business.