Explanation

The franchisor’s audited financial statements reveal a significant risk. As of December 31, 2024, Choice Hotels International, Inc. (Choice Hotels) reported a total shareholders' deficit of over $45 million. This means total liabilities exceed total assets, which is a primary indicator of financial instability. While the company is currently profitable, this negative net worth could potentially impact its long-term ability to support franchisees, invest in the brand, and weather economic downturns.

Potential Mitigations

• Your accountant must conduct a thorough analysis of the franchisor's complete financial statements, including the statement of cash flows and all footnotes.
• Discuss the implications of the franchisor's negative net worth on its long-term viability and support capabilities with your financial advisor.
• Ask your attorney about any state-required financial assurances, such as bonds or escrow, which may be mandated due to this financial condition.

Explanation

Item 20 data for the Radisson Blu brand in the U.S. is very limited, reflecting only one franchised outlet. Table 2 shows that this single unit experienced a transfer in 2023. While not a termination, a 100% transfer rate within the tiny franchisee sample could suggest underlying issues that prompted the original owner to exit. This lack of a stable, multi-unit franchisee base makes it difficult to assess typical franchisee experience or success within the system.

Potential Mitigations

• It is critical to contact the current and former owners of the single franchised unit listed in Item 20 to understand the reason for the transfer, which your attorney can help facilitate.
• Your business advisor should help you evaluate the risks of joining a system with an extremely small and seemingly unstable franchisee base in the U.S.
• Ask the franchisor for more context regarding the transfer and the performance of the franchised location before and after the change in ownership.

Explanation

Choice Hotels is a large, experienced hotel franchisor. However, it only acquired the Radisson Blu brand in August 2022 and began franchising it in April 2023. As of year-end 2024, there was only one franchised Radisson Blu hotel in the U.S. This makes it an unproven system *for Choice Hotels* and for franchisees in the U.S. market. You face risks associated with a lack of brand-specific track record, minimal peer support, and unverified system performance.

Potential Mitigations

• A business advisor can help you conduct extensive due diligence on the performance of the brand internationally and the franchisor's specific plans for U.S. expansion.
• It is crucial to speak with the single U.S. franchisee to understand their experience with Choice's management of this specific brand.
• Your attorney should help you evaluate the risks of being one of the first franchisees in a system being relaunched by a new owner.

Explanation

This risk is present in a significant way. Item 1 identifies Choice Hotels International, Inc. as the franchisor, but the company's own audited financial statements in Item 21 show a shareholder's deficit (negative net worth). This indicates the parent company itself is financially leveraged. While the FDD includes the parent's financials, the negative information within them presents a substantial risk regarding the overall stability and long-term health of the entity you are contracting with.

Potential Mitigations

• Your accountant must perform a detailed analysis of the parent company's financial statements, focusing on the cause and implications of the shareholder deficit.
• Discuss the potential risks that a parent company's negative net worth poses to its subsidiaries and the franchise system with a financial advisor.
• Consult your attorney to understand if this financial condition triggers any consumer protection provisions under your state's franchise laws.

Explanation

Item 3 discloses a significant pattern of litigation that presents a high risk. This includes multiple franchisee-initiated lawsuits alleging fraud, RICO violations, and breach of contract (Jai Sai Baba, CS Anaheim). There are also resolved arbitrations where Choice Hotels was ordered to pay franchisees substantial damages and/or attorney's fees. Furthermore, the FDD lists over 100 legal actions initiated by Choice against its franchisees in 2024 alone, indicating a highly litigious environment.

Potential Mitigations

• A franchise attorney must review the details of the pending and resolved litigation in Item 3 to assess the systemic risks they imply.
• The high volume of franchisor-initiated lawsuits should be discussed with your business advisor as an indicator of the franchise relationship's nature.
• Consider the significant legal disputes a major red flag and discuss the potential for future conflicts with your attorney.