IHOP 2011 Annual Report Download - page 27

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The revenues received by the Company from a typical franchise development arrangement under the Current Business Model
include (a) (i) a location fee equal to $15,000 upon execution of a single-store development agreement or (ii) a development fee
equal to $20,000 for each IHOP restaurant that the franchisee contracts to develop upon execution of a multi-store development
agreement; (b) a franchise fee equal to (i) $50,000 (against which the $15,000 location fee will be credited) for a restaurant
developed under a single-store development agreement or (ii) $40,000 (against which the $20,000 development fee will be credited)
for each restaurant developed under a multi-store development agreement, in each case paid upon execution of the franchise
agreement; (c) franchise royalties equal to 4.5% of weekly gross sales; (d) revenue from the sale of pancake and waffle dry-mixes;
and (e) franchise advertising fees. The franchise agreements generally provide for advertising fees comprised of (i) a local
advertising fee generally equal to 2.0% of weekly gross sales under the franchise agreement, which was typically used to cover
the cost of local media purchases and other local advertising expenses incurred by a local advertising cooperative, and (ii) a national
advertising fee equal to 1.0% of weekly gross sales under the franchise agreement. Area licensees are generally required to pay
lesser amounts toward advertising. Beginning in 2005, the Company and the IHOP franchisees agreed to reallocate portions of
the local advertising fees to purchase national broadcast, syndication and cable television time in order to reach our target audience
more frequently and more cost effectively (see "Marketing and Advertising").
Previous Business Model
IHOP franchised restaurants established prior to 2003 under our Previous Business Model were generally developed by the
Company. The Company was involved in all aspects of the development and financing of the restaurants. Under the Previous
Business Model, the Company typically identified and leased or purchased the restaurant sites for new company-developed IHOP
restaurants, built and equipped the restaurants and then franchised them to franchisees. In addition, IHOP typically financed as
much as 80% of the franchise fee for periods ranging from five to eight years and leased the restaurant and equipment to the
franchisee over a 25-year period. Of the 1,535 IHOP restaurants subject to franchise and area license agreements as of December 31,
2011, over half operate under the Previous Business Model
The revenues received from a restaurant franchised under the Previous Business Model include: (a) the franchise fee, a
portion of which (typically 20%) was paid upon execution of the franchise agreement; (b) interest income from the financing
arrangements for the unpaid portion of the franchise fee under the franchise notes and from the equipment notes; (c) franchise
royalties typically equal to 4.5% of weekly gross sales; (d) lease or sublease rents for the restaurant property and building; (e) rent
under an equipment lease; (f) revenues from the sale of pancake and waffle dry-mixes; and (g) franchise advertising fees as
described above.
In a few instances we have agreed to accept reduced royalties and/or lease payments from franchisees or have provided
other accommodations to franchisees for specified periods of time in order to assist them in either establishing or reinvigorating
their businesses.
From time to time we will reacquire restaurants developed under the Previous Business Model from a franchisee that is
struggling to fulfill its financial obligations or is otherwise in default of its agreements with the Company. In most cases we have
been able to refranchise these restaurants to new franchisees fairly quickly. Where that is not the case, we typically operate the
reacquired restaurant pending refranchising. These reacquired restaurants may require investments in remodeling and rehabilitation
before they can be refranchised. As a consequence, our reacquired restaurants frequently incur operating losses for some period
of time. Where appropriate, we may negotiate modified payment terms or agree to other accommodations with franchisees to
assist them to rehabilitate these restaurants.
Area License Agreements and International Franchise Agreements
We have entered into three long-term area license agreements covering the state of Florida and certain counties in the state
of Georgia and the province of British Columbia, Canada. As of December 31, 2011, the area licensees for the state of Florida and
certain counties in Georgia operated or sub-franchised a total of 153 IHOP restaurants, and the area licensees for the province of
British Columbia, Canada operated or sub-franchised a total of 13 IHOP restaurants. The area license agreements provide for
royalties ranging from 0.5% to 2.0% of gross sales and advertising fees equal to 0.25% of gross sales. The area license agreements
provide the licensees with the right to develop new IHOP restaurants in their respective territories. We also derive revenues from
the sale of proprietary products to these area licensees and in certain instances their sub-franchisees. Revenues from our area
licensees are included in franchise operations revenues for segment reporting purposes.
Franchise Operations
IHOP's Operations Department is charged with ensuring that high operational standards are met at all times by our franchisees.
Operating standards have been developed in consultation with franchisees and are detailed in the "IHOP Manual of Standard
Operating Procedures." Due to cultural and regulatory differences we may have different requirements for restaurants opened
outside of the United States.