IHOP 2010 Annual Report Download - page 40

Restaurant development plans under development agreements may not be implemented effectively. We
rely on franchisees to develop Applebee’s and IHOP restaurants. Restaurant development involves
substantial risks, including the following:
• the availability of suitable locations and terms for potential development sites;
• the ability of franchisees to fulfill their commitments to build new restaurants in the numbers
and the time frames specified in their development agreements;
• the availability of financing, at acceptable rates and terms, to both franchisees and third-party
landlords, for restaurant development;
• delays in obtaining construction permits and in completion of construction;
• developed properties not achieving desired revenue or cash flow levels once opened;
• competition for suitable development sites;
• changes in governmental rules, regulations, and interpretations (including interpretations of the
requirements of the ADA); and
• general economic and business conditions.
We cannot assure that the development and construction of facilities will be completed, or that any
such development will be completed in a timely manner. We cannot assure that present or future
development will perform in accordance with our expectations.
The opening and success of Applebee’s and IHOP restaurants depend on various factors, including
the demand for Applebee’s and IHOP restaurants and the selection of appropriate franchisee
candidates, the availability of suitable sites, the negotiation of acceptable lease or purchase terms for
new locations, costs of construction, permit issuance and regulatory compliance, the ability to meet
construction schedules, the availability of financing and other capabilities of franchisees. There is no
assurance that franchisees planning the opening of restaurants will have the business abilities or
sufficient access to financial resources necessary to open the restaurants required by their agreements.
It cannot be assured that franchisees will successfully participate in our strategic initiatives or operate
their restaurants in a manner consistent with our concept and standards.
Concentration of Applebee’s franchised restaurants in a limited number of franchisees subjects us to
greater credit risk. As of December 31, 2010, Applebee’s franchisees operated 1,553 Applebee’s
restaurants in the United States, comprising 83% of the total Applebee’s restaurants in the United
States. Of those restaurants, the nine largest Applebee’s franchisees owned 851 restaurants,
representing 55% of all franchised Applebee’s restaurants in the United States. The concentration of
franchised restaurants in a limited number of franchisees subjects us to a potentially higher level of
credit risk in respect of such franchisees because their financial obligations to us are greater as
compared to those franchisees with fewer restaurants. The risk associated with these franchisees is also
greater where franchisees are the sole or dominant franchisee for a particular region of the United
States, as is the case for most domestic Applebee’s franchised territories. In particular, if any of these
franchisees experiences financial or other difficulties, the franchisee may default on its obligations
under multiple franchise agreements including payments to us and the maintenance and improvement
of its restaurants. If any of these franchisees are subject to bankruptcy or insolvency proceedings, a
bankruptcy court may prevent the termination of the related franchise agreements and development
agreements. Any franchisee that is experiencing financial difficulties may also be unable to participate
in implementing changes to our business strategy. Any franchisee that owns and operates a significant
number of Applebee’s restaurants and fails to comply with its other obligations under the franchise
agreement, such as those relating to the quality and preparation of food and maintenance of
restaurants, could cause significant harm to the Applebee’s brand and subject us to claims by
consumers even if we are not legally liable for the franchisee’s actions or failure to act. The franchising
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