Explanation

Holiday Hospitality Franchising, LLC (Holiday) and its parent, Six Continents Hotels, Inc., provided audited financial statements. The auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion. The financials do not indicate operating losses or other common signs of financial instability, and there is no “going concern” note. Therefore, this specific risk was not identified in the FDD package. Financial stability is crucial for a franchisor to provide ongoing support and invest in the brand.

Potential Mitigations

• An experienced franchise accountant should still conduct a thorough review of the franchisor's and parent's financial statements, including all footnotes.
• Discuss the overall financial health of the brand and its parent company with your financial advisor to understand their capacity for long-term support.
• It is wise to ask your attorney to confirm that the provided financial statements comply with all federal and state disclosure requirements.

Explanation

This specific risk was not identified in the FDD package. The voco brand operates in the established and mainstream upscale hotel industry, which is not typically considered a fad. A fad business is one based on a fleeting trend, which can create significant risk for franchisees who are locked into long-term agreements that may outlast consumer interest. Evaluating a business concept's long-term market demand is a crucial part of due diligence.

Potential Mitigations

• A business advisor can help you assess the long-term market demand for the specific hotel segment and brand positioning.
• Review the franchisor's plans for innovation and adaptation with your business advisor to gauge their commitment to long-term relevance.
• Your financial advisor should assist you in evaluating the business model's resilience to economic shifts and changing travel trends.

Explanation

This risk was not identified. The executives listed in Item 2 have extensive experience within the hospitality industry and with the parent company, InterContinental Hotels Group (IHG), or its affiliates. Lack of management experience in franchising or the specific industry can be a significant risk, as it may lead to inadequate support systems, poor strategic decisions, and a misunderstanding of franchisee needs. It is always wise to vet the franchisor's leadership team.

Potential Mitigations

• You should still review the backgrounds of key personnel in Item 2 with a business advisor to confirm their experience is relevant to your needs.
• Discussing the management team's reputation and effectiveness with current franchisees is a valuable due diligence step.
• Your attorney can help you understand the roles of the key executives and how their experience relates to the support you will receive.

Explanation

This risk was not identified, as the ultimate parent, InterContinental Hotels Group PLC, is a publicly traded company, not a private equity firm. When a franchisor is owned by a private equity firm, there may be a focus on short-term profitability and a quick exit strategy, which can sometimes conflict with the long-term health of the franchise system and the interests of individual franchisees. This can manifest as increased fees or reduced support.

Potential Mitigations

• Engaging a business advisor to research the ownership structure and history of any franchise system is a wise precaution.
• It is prudent to ask your attorney to review the assignment clause in the Franchise Agreement to understand how a sale of the system could impact you.
• Always ask current franchisees about any recent changes in ownership and the resulting impact on support and fees.

Explanation

This risk was not identified. Holiday discloses its complex structure, including its ultimate parent, InterContinental Hotels Group PLC, and its direct parent, Six Continents Hotels, Inc. (SCH). The FDD also includes audited financial statements for both Holiday and SCH. Failing to disclose a parent company or provide its financials when required can obscure the true financial health and backing of the franchise system, hiding significant risks from a potential franchisee.

Potential Mitigations

• A franchise attorney should always be consulted to review the corporate structure disclosed in Item 1 and ensure all required disclosures have been made.
• Having an accountant review the financials of both the franchisor and any parent guarantors is a critical due diligence step.
• Your business advisor can help you understand the relationships between the various affiliated companies and how they might affect you.

Explanation

This risk was not identified in the FDD package. Holiday's history does not appear to involve predecessors in a way that would obscure negative historical information. When a franchisor acquires a system from a predecessor, it's important to understand the predecessor's history regarding litigation, bankruptcy, and franchisee relations, as these can indicate inherited problems within the system that may continue to affect franchisees.

Potential Mitigations

• Your attorney should always review Item 1 for any mention of predecessors and cross-reference with Items 3 and 4 for litigation or bankruptcy history.
• A business advisor can help you research the history of a brand, especially if it has been operated by other companies in the past.
• In cases involving a predecessor, asking long-term franchisees about their experience under the prior ownership is a crucial step.