Explanation

The financial statements for Hilton Franchise Holding LLC (Hilton) are provided in Exhibit C. An independent auditor issued an unqualified opinion, and the financials show significant assets, revenue, and net income with no indicators of financial weakness such as a going concern note. Hilton appears to be a financially stable and well-established entity capable of supporting the franchise system. This specific risk was not identified in the FDD package.

Potential Mitigations

• An experienced franchise accountant should review the franchisor's financial statements, including all footnotes and the auditor's opinion, to confirm financial health.
• It is good practice for your accountant to analyze the franchisor's cash flow and balance sheet to assess its ability to fund its obligations to franchisees.
• Discussing the franchisor's financial stability and investment in the brand with a business advisor can provide additional context.

Explanation

Item 20 data for the years 2022-2024 shows zero terminations, non-renewals, reacquisitions, or other cessations of franchised Tru hotels. Instead, the system shows consistent net growth each year. The data in Exhibit B, which lists franchisees who left the system in 2024, is also very limited. This indicates a very low rate of franchisee turnover and suggests a stable and growing system. This specific risk was not identified.

Potential Mitigations

• Your accountant can help you analyze the tables in Item 20 to calculate the effective annual turnover rate and compare it to industry averages.
• Engaging a business advisor to help you formulate questions for current franchisees about system satisfaction is a key part of due diligence.
• It is prudent for your attorney to review any footnotes to the Item 20 tables for definitions that might obscure turnover.

Explanation

This risk was not identified in the FDD package. Tru by Hilton operates in the established midscale hotel market segment. While a newer concept, it is backed by Hilton, a major hospitality company with a long history of developing and adapting hotel brands. A business being a 'fad' typically applies to concepts tied to fleeting trends with questionable long-term consumer demand, which does not appear to be the case here.

Potential Mitigations

• Engaging a business advisor to independently analyze the long-term consumer demand for this specific hotel market segment is a prudent step.
• Investigate the brand's adaptability and plans for future innovation by reviewing Item 11 and discussing it with the franchisor.
• An accountant can help you assess the business model's resilience to economic shifts and changing travel trends.

Explanation

This risk was not identified in the FDD package. Item 2 lists the directors and principal officers, showing extensive and long-term experience in the hospitality and franchise industries. Executives like Christopher Nassetta and Kevin Jacobs have been with Hilton for over a decade in key leadership roles. The management team appears to be highly experienced in both managing hotel operations and franchise systems, which is a positive indicator for franchisees.

Potential Mitigations

• A business advisor can help you research the professional backgrounds of the key executives listed in Item 2.
• During due diligence calls, it's beneficial to ask current franchisees about their perception of the management team's competence and support.
• Your attorney can review the litigation history in Item 3 for any cases involving members of the management team.

Explanation

Item 1 clearly discloses the parent companies, Hilton Domestic Operating Company Inc. and Hilton Worldwide Holdings Inc. The franchisor entity, Hilton Franchise Holding LLC, provides its own audited financial statements in Exhibit C. There does not appear to be a failure to disclose a parent company or a situation where parent financials would be required but are withheld. The disclosure appears to be compliant and transparent in this regard.

Potential Mitigations

• Your accountant should confirm that the provided financial statements for the franchising entity are audited and complete.
• If a parent company guarantees the franchisor's obligations, your attorney should ensure that the guarantee is a formal exhibit to the FDD.
• A business advisor can help you understand the corporate structure and the relationships between the franchisor and its parent entities.

Explanation

Item 1 provides a detailed history of Hilton's corporate structure, including predecessors like Park Hotels & Resorts, Hilton Hotels Corporation (HHC), and various other entities for its different brands. The disclosure appears comprehensive, listing the predecessor entities and the timeframes they were involved. There is no indication of obscured or incomplete information regarding the company's lineage. This transparency allows for a clearer assessment of the system's history.

Potential Mitigations

• A careful review of the predecessor information in Item 1 with your attorney is important to understand the system's history.
• If there are any predecessor entities listed, your attorney should also check their litigation and bankruptcy history in Items 3 and 4.
• When speaking with long-term franchisees, asking about their experience under any previous ownership can provide useful context.