Explanation

The franchisor's ultimate parent and guarantor, Wyndham Hotels & Resorts, Inc. (WHR), presents audited financial statements in Exhibit D that appear stable. WHR shows consistent profitability and positive net worth, with no indicators of financial instability, such as a 'going concern' note from the auditor. Financial stability is important as it suggests the franchisor can support the brand and its franchisees.

Potential Mitigations

• Having an accountant review the consolidated financial statements in Exhibit D is a wise step to independently verify the guarantor's financial health.
• Your attorney should confirm the enforceability and scope of the parent company's Guaranty of Performance.
• Engaging a business advisor can help you assess the overall health and strategic direction of the parent company in the competitive hotel industry.

Explanation

The franchisee turnover rates disclosed in Item 20 do not appear to be high. In 2024, a total of 10 U.S. franchises were terminated or ceased operations for other reasons, representing about 3.4% of the outlets at the start of the year. Low turnover can suggest a stable system and general franchisee satisfaction, while high turnover can be a red flag for systemic issues.

Potential Mitigations

• To understand the reasons for the departures that did occur, it is a good practice to contact former franchisees listed in Exhibit E-2.
• A business advisor can help you compare these turnover rates against industry benchmarks for similar hotel franchises.
• Your attorney can help you formulate questions for former franchisees to inquire about their reasons for leaving the system.

Explanation

The data in Item 20 does not indicate rapid, uncontrolled growth; in fact, the number of U.S. franchised outlets has slightly decreased over the last three years. This suggests the franchisor, Microtel Inns and Suites Franchising, Inc. (MISF), is not over-extending its support systems. While rapid growth can strain a franchisor's resources, that does not appear to be a risk here.

Potential Mitigations

• Discuss the franchisor's future growth plans and how they intend to support new and existing franchisees with your business advisor.
• A review of the franchisor's financial statements in Item 21 with your accountant can help assess their capacity to support future growth.
• Speaking with current franchisees can provide insight into the current quality of franchisor support.

Explanation

This risk is not present. MISF has been franchising since 1995 and is part of the extensive Wyndham Hotels & Resorts system, indicating a long-established and proven business model. Investing in a new or unproven system carries higher risks related to brand recognition and operational support, which are not applicable here.

Potential Mitigations

• A business advisor can help you evaluate the brand's current market position and competitive advantages.
• Reviewing the history and stability of the parent company, Wyndham Hotels & Resorts, with your financial advisor provides additional context.
• Discussions with long-standing franchisees can offer insights into the system's evolution and consistency over time.

Explanation

The franchise is for an economy hotel, which is a well-established and enduring business sector, not a fad. Fad-based businesses carry the risk of declining consumer interest over time, which could leave you with a long-term contractual obligation for a business with a short-term appeal. This risk does not apply to this offering.

Potential Mitigations

• Even for an established concept, it is wise to engage a business advisor to research local market demand for this specific hotel segment.
• Your accountant can help you project financial performance based on the specific economic conditions of your target area.
• Assess the long-term viability and competitive landscape of the economy hotel sector in your proposed location.

Explanation

This risk was not identified. The executive team described in Item 2 has extensive and long-standing experience within Wyndham Hotels & Resorts and the broader hospitality industry. Inexperienced management can pose a risk through poor strategic decisions or inadequate support, but the leadership team here appears well-established and knowledgeable.

Potential Mitigations

• While the top leadership is experienced, it is still valuable to research the background of the specific brand and operational leaders you will interact with most.
• Speaking with current franchisees can provide direct insight into the effectiveness and responsiveness of the management team.
• A business advisor can help you assess the company's overall strategic direction and leadership quality within the hotel industry.

Explanation

This risk is not present. Item 1 indicates the ultimate parent company, Wyndham Hotels & Resorts, Inc., is a publicly traded company, not one owned by a private equity firm. Private equity ownership can sometimes introduce risks related to short-term profit motives over long-term brand health, but that dynamic does not apply here.

Potential Mitigations

• Your financial advisor can help you understand the implications of being part of a publicly traded company, including its financial reporting obligations.
• Reviewing public financial filings with an accountant provides transparency into the company's health and strategy.
• A business advisor can help assess the parent company's long-term strategy and commitment to its various hotel brands.

Explanation

This risk is not present. Item 1 clearly outlines the corporate structure, identifying Wyndham Hotels & Resorts, Inc. (WHR) as the ultimate parent company. Furthermore, WHR's audited financial statements and a performance guaranty are provided in Exhibit D, ensuring transparency regarding the financial strength of the entity backing the franchisor's obligations.

Potential Mitigations

• It is still a valuable exercise for your accountant to review the parent company's financial statements provided in Exhibit D.
• Your attorney should review the terms of the parent company's performance guaranty to understand its scope and your protections.
• In discussions with the franchisor, you can seek clarity on the relationship and support flow between the parent company and the Microtel brand.

Explanation

The FDD does not indicate a recent acquisition or a problematic history with predecessor companies for the Microtel brand itself. The franchisor has a long operational history under the Wyndham umbrella. Issues can sometimes be inherited when a brand is acquired, but that does not appear to be a relevant risk factor in this case.

Potential Mitigations

• Even without a direct predecessor, discussing the brand's history and evolution with long-term franchisees can provide valuable context.
• Your business advisor can research the brand's history within the Wyndham portfolio to confirm a stable lineage.
• A review of the litigation history in Item 3 with your attorney can reveal any lingering issues from the past.