IHOP 2013 Annual Report Download - page 26

5
Franchising
Franchisee Relationships
We highly value good franchisor/franchisee relations and strive to maintain positive working relationships with our
franchisees. For several years, IHOP and Applebee’s franchisees have operated their own representative advisory groups. These
groups provide a forum for franchisees to share demonstrated best practices, offer counsel and review successful strategies,
while working side-by-side with management of the Applebee's and IHOP brands. Applebee’s sponsors its Franchise Business
Council (“FBC”), which consists 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, while the other franchisee representatives are elected
by our franchisees. IHOP sponsors its Franchise Leadership Council (“FLC”), an elected and appointed body of IHOP
franchisees formed to advise and assist senior management with respect to a broad range of matters relating to the operation of
IHOP restaurants.
We have expanded the ways in which our management collaborates with the FLC and FBC by establishing several cross-
brand committees. FBC committees focus on franchise marketing, information technology, operations and back-of-the-
restaurant innovation, while FLC committees focus on marketing, menu, information technology and innovation.
Franchise Agreements and Fees
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 within 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 gross sales. We have agreements with most of our franchisees for
Applebee's restaurants opened before January 1, 2000, which provide for royalty rates of 4%. 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.
Under the Current IHOP Business Model, a potential franchisee first enters into either a single-restaurant development
agreement or a multi-restaurant development agreement with us and, upon completion of a prescribed approval procedure, is
primarily responsible for the development and financing of one or more new IHOP franchised restaurants.
The revenues we receive from a typical franchise development arrangement under the Current IHOP Business Model
include (a) a development fee equal to $20,000 for each IHOP restaurant that the franchisee contracts to develop upon
execution of a multi-restaurant development agreement; (b) a franchise fee equal to (i) $50,000 for a restaurant developed
under a single-restaurant development agreement or (ii) $40,000 (against which the $20,000 development fee will be credited)
for each restaurant developed under a multi-restaurant 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 principal terms of the franchise agreements entered into under the Previous IHOP Business Model and the Current
IHOP Business Model, including the franchise royalties and the franchise advertising fees, are substantially the same except
with respect to the terms relating to the franchise fee, lease or sublease rents for the restaurant property and building, and
interest income from any franchise fee notes and equipment leases.
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.