Burger King 2012 Annual Report Download - page 12

Table of Contents
contributions, or failure to operate in compliance with our standards) can lead to termination of the franchise agreement. Prospective franchisees must meet our
minimum approval criteria to ensure that they are adequately capitalized and that they satisfy certain other requirements.
. In the U.S. and Canada, we typically enter into a separate franchise agreement for each restaurant. The typical franchise agreement
in the U.S. and Canada has a 20-year term (for both initial grants and renewals of franchises) and contemplates a one-time franchise fee which must be paid
in full before the restaurant opens for business, or in the case of renewal, before expiration of the current franchise term. Subject to the incentive programs
described below, most existing franchise restaurants pay a royalty of 4.5% in the U.S. and 4.0% in Canada. Since June 2003, most new franchise restaurants
opened and franchise agreements renewed in the United States generated royalties at the rate of 4.5% of gross sales for the full franchise term. The weighted
average royalty rate in the U.S. and Canada was 3.9% as of December 31, 2012. In addition to their royalties, franchisees in the U.S. and Canada are
generally required to make a contribution to the advertising fund equal to a percentage of gross sales, typically 4%, on a monthly basis.
During 2012, we offered franchisees reduced up-front franchise fees and limited-term royalty rate reductions to accelerate development of new
restaurants. This development incentive program will remain in place during 2013. In addition, in an effort to improve the image of our restaurants in the
United States, we offered U.S. franchisees reduced up-front franchise fees and limited-term royalty and advertising fund rate reductions to remodel restaurants
in our 20/20 image during 2011 and 2012. These limited-term incentive programs are expected to negatively impact our effective royalty rate until 2021.
However, we expect this impact to be partially mitigated as we will also be entering into new franchise agreements in the United States with a 4.5% royalty rate
as well as benefits derived from sales increases as a result of our reimaging initiative.
. Historically, in our international markets, we entered into franchise agreements for each restaurant with up-front franchise fees and
monthly royalties and advertising contributions each of up to 5% of gross sales. However, as part of our international growth strategy, we have increasingly
entered into master franchise agreements or development agreements that grant franchisees exclusive development rights and, in some cases, require them to
provide support services to other franchisees in their markets. We enter into these agreements with well capitalized partners who are willing to make substantial
upfront equity commitments, agree to aggressive development targets, and have strong local management teams. The up-front franchise fees and royalty rate
paid by master franchisees vary from country to country, depending on the facts and circumstances of each market.
In some countries, we have entered into master franchise agreements that allow franchisees to sub-franchise restaurants to other franchisees within their
territory. In other countries, we have entered into arrangements with franchisees under which they have agreed to nominate third party franchisees to develop
and operate restaurants within their respective territories under franchise agreements with us. As part of these arrangements, the franchisees have agreed to
provide certain support services to franchisees on our behalf, and, in some cases, we have agreed to share royalties and franchise fees paid by such third
party franchisees. As part of our international growth strategy, we are also entering into joint ventures with franchisees and granting master franchise and
development rights to these entities. As part of these arrangements, we seek to receive a significant minority equity stake in the joint venture without deploying
our capital. We expect to continue to use this investment vehicle as one of the strategies to increase our presence globally.
. We have not historically required that we own the land or the building associated with our franchise restaurants and
our standard franchise agreement does not contain a lease component. However, in implementing our refranchising initiative, we have, in many
circumstances, retained the lease or title on the property and building associated with the refranchised restaurants. Consequently, the number of our property
leases with franchisees increased significantly during 2012. To the extent that we lease or sublease the property to a franchisee, we will enter into a separate
lease agreement. For properties that we lease
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Source: Burger King Worldwide, Inc., 10-K, February 22, 2013 Powered by Morningstar® Document Research℠
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