Explanation

The FDD discloses in the Item 20 tables for Sonesta Hotels & Resorts that one franchised unit ceased operations in 2024. While the total number of franchised units is small, making percentages volatile, any cessation of operations can be a point of concern. This data suggests that not all franchisees who have opened have remained in operation, which could be an indicator of potential challenges within the system for some operators.

Potential Mitigations

• It is crucial to contact current and former franchisees listed in Exhibits K-1 and K-2 to discuss their experiences, profitability, and reasons for leaving the system.
• A thorough analysis of the Item 20 tables with your accountant can help quantify the turnover rates and compare them to industry averages.
• Your attorney can help you ask the franchisor for more specific, non-confidential details about the circumstances surrounding any outlet cessations.

Explanation

This risk was not identified in the FDD package. Rapid system growth can be a risk if a franchisor's support infrastructure, such as training, site selection assistance, and operational support, does not keep pace with the number of new units being opened. This can result in diluted support for all franchisees and may affect system-wide quality and consistency, potentially harming the brand's reputation and your business's performance.

Potential Mitigations

• Engaging a business advisor to research the franchisor’s reputation for support among existing franchisees is a prudent step.
• Understanding the franchisor's plans for scaling its support systems in line with growth can be clarified in discussions with their management team.
• Your accountant can help evaluate whether the franchisor’s financial statements indicate sufficient reinvestment in support infrastructure.

Explanation

This risk was not identified in the FDD package. A 'fad' business is one based on a short-term trend rather than sustained consumer demand. While a trendy concept can be successful initially, a key risk is that consumer interest may decline over the 20-year term of your franchise agreement. If this were to happen, you would still be bound by your contractual obligations, including paying royalties, even if your business is no longer viable or profitable.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term consumer demand for the services offered.
• It is important to evaluate the franchisor's commitment to research and development to ensure the brand can adapt to changing market trends.
• Your accountant can help you model the financial risks associated with potential declines in consumer interest over the life of the franchise.

Explanation

This risk was not identified in the FDD package. The management team listed in Item 2 appears to have extensive experience in the hotel and franchising industries. In general, a lack of direct experience by the franchisor's key personnel in franchising or in the specific industry can be a risk. Inexperienced management might struggle to provide effective support, training, and strategic direction, which could negatively impact your business operations and potential for success.

Potential Mitigations

• It is always wise to have a business advisor help you research the backgrounds of the key executives listed in Item 2.
• In discussions with the franchisor, you could inquire about the specific roles and experience of the support team members you will be working with.
• Your attorney can help you verify any claims of experience by asking targeted questions during your due diligence calls with other franchisees.

Explanation

This risk was not identified in the FDD package. The franchisor is a subsidiary of Sonesta International Hotels Corporation, a major hotel company, not a private equity firm. When a franchisor is owned by a private equity firm, there can be a risk that management decisions prioritize short-term returns for investors over the long-term health of the brand and its franchisees. This could manifest as reduced support, increased fees, or a quick sale of the franchise system.

Potential Mitigations

• A business advisor can help you investigate the ownership structure of any franchisor to understand the motivations of its ultimate owners.
• It is prudent to ask your attorney to review any clauses in the Franchise Agreement that relate to the sale or assignment of the franchise system.
• Speaking with other franchisees can provide insight into how ownership changes may have affected the system in the past.

Explanation

The franchisor, SRLHF, is a subsidiary of Red Lion Hotels Corporation (RLHC), which in turn is owned by Sonesta. The FDD provides the audited financial statements for the parent, RLHC, and RLHC provides a Guaranty of Performance. This structure appears to be appropriately disclosed. Therefore, the specific risk of non-disclosure or withholding necessary parent financials is not present. This transparency allows for a more complete assessment of the overall financial strength backing your franchise.

Potential Mitigations

• Your accountant should review the provided parent company financials and its relationship to the franchisor entity.
• It is important for your attorney to review the parent's Guaranty of Performance to understand the extent of the obligations it covers.
• A discussion with your business advisor can help clarify the complex corporate structure and how it might impact your franchise.