Explanation

This risk was not identified. The FDD does not indicate that the franchisor is expanding at a rate likely to outpace its support capabilities. Uncontrolled, rapid growth can be a concern because it may strain a franchisor's financial and personnel resources, potentially leading to a decline in the quality and availability of support, training, and operational guidance for all franchisees in the system.

Potential Mitigations

• It is always wise to ask the franchisor about their growth plans and how they intend to scale support systems, a topic to discuss with a business advisor.
• Speaking with both new and established franchisees can provide insight into the current quality of franchisor support.
• Having an accountant review the franchisor's financial statements can help assess if they have the resources to support future growth.

Explanation

This risk was not identified. Choice Hotels is a long-established, major global franchisor, and the WoodSpring Suites brand has been operating for many years. Investing in a new or unproven franchise system carries higher risk because the business model may not be validated, brand recognition is low, and the franchisor may lack the experience and resources to provide adequate support, increasing the chance of system-wide failure.

Potential Mitigations

• When evaluating any franchise, it's good practice for your business advisor to assess the franchisor's and its management's experience in both the industry and in franchising.
• An accountant can review financial statements to gauge the maturity and stability of the franchisor's business model.
• Your attorney can help you understand the history of the company as disclosed in Item 1.

Explanation

This risk was not identified. The extended-stay hotel model is a well-established segment of the lodging industry and does not appear to be a short-term fad. Investing in a fad business is risky because consumer interest can decline rapidly, leaving you with a long-term contractual obligation for a business with diminished market demand. This could jeopardize your entire investment once the trend passes.

Potential Mitigations

• A business advisor can help you research the long-term market demand and competitive landscape for any industry you consider entering.
• Reviewing a franchisor's plans for innovation and adaptation, often mentioned in Item 11, is a good way to assess their long-term vision.
• Your financial advisor can help model the business's resilience to shifts in consumer trends and economic cycles.

Explanation

This risk was not identified. Item 2 indicates that the management team of Choice Hotels possesses extensive and long-standing experience in both the hospitality industry and in managing large franchise systems. An inexperienced management team can be a significant risk, as it may lead to poor strategic decisions, inadequate franchisee support, and a higher potential for system-wide problems, even if the business concept itself is sound.

Potential Mitigations

• For any franchise, it is prudent to have a business advisor help you vet the background and track record of the key management personnel listed in Item 2.
• Speaking with existing franchisees is an effective way to gauge their confidence in the current management team's direction and support.
• Your attorney can help you research the public history of the executive team.

Explanation

This risk was not identified, as Choice Hotels is a publicly traded corporation, not a private equity-owned entity. Private equity ownership can sometimes pose risks, such as a focus on short-term returns over the long-term health of the brand, which may lead to increased fees, reduced franchisee support, or a quick sale of the franchise system.

Potential Mitigations

• In any franchise investment, it is wise to understand the ownership structure with the help of your attorney.
• If a franchisor is PE-owned, a business advisor can help research the firm's track record with other franchise systems.
• Reviewing transfer rights in the Franchise Agreement with your attorney is important to understand what happens if the system is sold.

Explanation

This risk was not identified in the FDD. Choice Hotels International, Inc. is disclosed as the parent company, and its consolidated financial statements are provided. In some cases, a franchisor might be a thinly capitalized subsidiary of a larger parent. If the parent's financial statements are not also disclosed, it can obscure the true financial strength and stability backing the franchise system.

Potential Mitigations

• Your attorney should always verify the corporate structure disclosed in Item 1.
• If a franchisor is a subsidiary, an accountant should determine if the parent company's financials are required and have been provided.
• Your attorney can advise on the legal implications if a parent company provides a performance guarantee.

Explanation

This risk was not identified. The FDD discloses the predecessor history and does not indicate any negative information, such as bankruptcy, specifically associated with the predecessor entity. A franchisor's predecessor history is important because it can reveal inherited problems, such as a poor reputation, a history of litigation, or franchisee failures, that may continue to affect the system even under new ownership.

Potential Mitigations

• When a predecessor is listed in Item 1, it is good practice to ask your attorney to carefully review its disclosed history in Items 3 and 4.
• A business advisor can help you conduct independent research on a predecessor's historical track record.
• Speaking with long-term franchisees who operated under the predecessor can provide valuable historical context.