Explanation

The financial statements for the parent company, Red Lion Hotels Corporation (RLHC), which guarantees the franchisor's performance, show an accumulated deficit of $9.7 million and a net loss of $2.9 million for fiscal year 2024. These figures, coupled with significant cash used in operations, may indicate financial weakness. This could potentially impact the franchisor's ability to support you, invest in the brand, and fulfill its obligations without relying on funds from its ultimate parent.

Potential Mitigations

• A franchise accountant should perform a detailed analysis of the audited financial statements for the parent, RLHC, including all footnotes and year-over-year trends.
• Ask the franchisor about its plans to address the net loss and accumulated deficit, and clarify the nature of financial support from the ultimate parent, Sonesta.
• Your business advisor can help you assess if the franchisor’s financial health is sufficient to support its growth plans and franchisee needs.

Explanation

Data for the Sonesta Select brand reveals potentially high franchisee turnover. In 2023, four franchised outlets ceased operations for other reasons out of a starting base of 14, representing a churn rate of over 28%. Additionally, the FDD discloses that two more franchised hotels were terminated or ceased operations in early 2025. Such a high rate of units leaving the system can be a significant indicator of potential franchisee dissatisfaction or systemic business challenges.

Potential Mitigations

• It is critical to contact a significant number of former franchisees listed in Item 20 to understand their reasons for leaving the system.
• Your accountant should carefully analyze the turnover data across all Item 20 tables to calculate the effective annual churn rate.
• Discuss the high turnover rate directly with the franchisor and request specific, verifiable explanations for the departures.

Explanation

The Sonesta Essential brand is undergoing extremely rapid growth, expanding from 5 to 24 franchised outlets in 2024, a 380% increase. While growth can be positive, such a rapid expansion, particularly for a new system with a financially weak parent, may strain the franchisor's resources. This could potentially compromise the quality and availability of essential training, site selection assistance, and ongoing operational support for all franchisees in the system.

Potential Mitigations

• Inquire with the franchisor about their specific plans to scale support staff and infrastructure to match this rapid growth.
• Your business advisor should help you assess whether the franchisor’s operational capacity can sustain this rate of expansion without diminishing support quality.
• Speaking with other new franchisees can provide insight into the current level of support they are receiving.

Explanation

The franchisor has been offering franchises for Sonesta Select only since September 2021 and for Sonesta Essential since December 2022. As a new system, there is a limited performance history for franchised locations. This presents a higher risk regarding the long-term viability of the business model, the effectiveness of the support systems, and overall brand recognition. Your investment is in a concept that is still in its early stages of development in the franchise market.

Potential Mitigations

• A business advisor can help you conduct extensive due diligence on the underlying business model and the management team's prior experience.
• Speaking with the earliest franchisees in the system is crucial to understanding their experiences with the developing brand.
• Your attorney might be able to negotiate more favorable terms to compensate for the higher risks associated with an unproven system.

Explanation

The franchisor's ultimate parent is an alternative asset management company, and its executives are deeply integrated into the franchisor's management. This ownership structure may lead to decisions that prioritize short-term investor returns over the long-term health of the franchise system. The Franchise Agreement also gives the franchisor a broad and unrestricted right to sell the system or assign the agreement, which could result in a new owner with different priorities or capabilities.

Potential Mitigations

• It is wise to research the track record of the parent asset management firm with other franchise systems they have owned.
• Your attorney should explain the implications of the franchisor's right to sell the system without your consent.
• Discuss with current franchisees whether they have observed any changes in support or strategy that appear driven by investor priorities.

Explanation

Item 3 discloses a significant amount of litigation. While many concluded cases were franchisee-initiated lawsuits settled for small amounts or franchisor-initiated collection suits, some are notable. These include a case for tortious interference brought by a competitor that was settled with a $500,000 payment by the franchisor's predecessor. There is also a pattern of the franchisor suing franchisees for unpaid fees. This history suggests a potentially litigious environment.

Potential Mitigations

• A thorough review of all litigation disclosed in Item 3 with your franchise attorney is essential to understand the nature and outcomes of the disputes.
• Your attorney can help assess whether the litigation pattern suggests systemic problems or an overly aggressive enforcement culture.
• Consider the financial and operational risks of entering a system with a history of frequent legal disputes.