IHOP 2012 Annual Report Download - page 23

5
Franchise Operations
We continuously monitor franchise restaurant operations, principally through our Franchise Area Directors and our Directors
of Franchise Operations. Company and third-party representatives make both scheduled and unannounced inspections of restaurants
to ensure that only approved products are in use and that our prescribed operations practices and procedures are being followed.
We have the right to terminate a franchise agreement if a franchisee does not operate and maintain a restaurant in accordance with
our requirements. We also monitor the financial health of our franchisees through business and financial reviews.
We maintain a domestic Franchise Business Council which provides input about operations, marketing, product development
and other aspects of restaurants for the purpose of improving the franchise system. As of December 31, 2012, the Franchise
Business Council consisted of eight franchisee representatives and three members of our senior management team. One franchisee
representative, the founder of Applebee's, is a member for life. The other franchisee representatives are elected by franchisees to
staggered two-year terms. The Franchise Business Council is also responsible for the appointment of members to advisory
committees related to marketing, restaurant operations, information technology, product development and human resources.
Franchising
Generally, franchise arrangements for Applebee's restaurants consist of a development agreement and separate franchise
agreements for each restaurant. Development agreements grant to the franchise developer the exclusive right to develop Applebee's
restaurants in a designated geographical area over a specified period of time. The term of a domestic development agreement is
generally 20 years. The development agreements typically provide for an initial development schedule of one to five years as
agreed upon by the Company and the franchisee. At or shortly prior to the completion of the initial development schedule or any
subsequent supplemental development schedule, the Company and the franchisee generally execute supplemental development
schedules providing for the development of additional Applebee's restaurants in the franchise developer's exclusive territory.
Prior to the opening of each new Applebee's restaurant, the franchisee and the Company enter into a separate franchise
agreement for that restaurant. Our current standard domestic Applebee's franchise agreement provides for an initial term of 20 years
and permits four renewals, in five-year increments, for up to an additional 20 years, upon payment of an additional franchise fee.
Our current standard domestic Applebee's franchise arrangement calls for an initial franchisee fee of $35,000 and a royalty fee
equal to 4% of the restaurant's monthly net sales. We have agreements with a majority of our franchisees for Applebee's restaurants
opened before January 1, 2000 which provide for royalty rates of 4% and extend the initial term of the franchise agreements until
2020. The terms, royalties and advertising fees under a limited number of franchise agreements and other franchise fees under
older development agreements vary from the currently offered arrangements.
As of December 31, 2012, we had 68 franchise groups, including 28 international franchise groups. We have generally selected
franchisees that are experienced multi-unit restaurant operators. Many franchisees have operated or concurrently operate other
restaurant concepts. We have assigned development rights to the vast majority of domestic areas in all states except Hawaii and
the company-operated market in the Kansas City area.
Domestic Franchising
As of December 31, 2012, there were 1,862 domestic Applebee's franchise restaurants. During 2012, 20 domestic franchise
restaurants opened, six domestic franchise restaurants closed. 154 company-operated restaurants were franchised, of which 56
went to existing franchise groups and 98 to new franchise groups. The number of restaurants held by an individual franchisee
ranges from one to 438 restaurants. The table below sets forth information regarding the number of Applebee's restaurants owned
by domestic franchisees as of December 31, 2012 as well as the total number of restaurants falling into each of the listed ownership
ranges.
Franchisees Restaurants
Number of Restaurants Held by Franchisee Number Percent of Total Number Percent of Total
One to ten ............................................................................ 9 22.5% 56 3.0%
Eleven to twenty-five .......................................................... 11 27.5% 198 10.6%
Twenty-six to fifty............................................................... 8 20.0% 328 17.6%
Fifty-one to one hundred ..................................................... 9 22.5% 608 32.7%
Greater than one hundred .................................................... 3 7.5% 672 36.1%
Total(a)............................................................................................ 40 100.0% 1,862 100.0%
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(a) Percentages may not add due to rounding.