IHOP 2013 Annual Report Download - page 38

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and may increase our exposure to governmental investigations or litigation. In connection with the continued operation or
remodeling of certain restaurants, we or our franchisees may be required to expend funds to meet federal, state and local and
foreign regulations. The inability to obtain or maintain such licenses or publicity resulting from actual or alleged violations of
such laws could have an adverse effect on our results of operations.
Finally, we are subject to federal regulation and certain state laws which govern the offer and sale of franchises. Many state
franchise laws contain provisions that supersede the terms of franchise agreements, including provisions concerning the
termination or non-renewal of a franchise. Some state franchise laws require that certain materials be registered before
franchises can be offered or sold in that state. The failure to obtain or retain licenses or approvals to sell franchises could
adversely affect us and the franchisees. Changes in, and the cost of compliance with, government regulations could have a
material effect on operations.
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
Americans with Disabilities Act); and
• general economic and business conditions.
We cannot assure that the development and construction of franchised restaurants will be completed, or that any such
development will be completed in a timely manner. We cannot assure that present or future development plans 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 ability or sufficient access to financial
resources necessary to open and operate 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 concepts and
standards.
Approximately 99% of our restaurants are owned and operated by our franchisees and, as a result, we are highly
dependent upon our franchisees. We have significantly increased the percentage of restaurants owned and operated by our
franchisees. As a result, we expect to receive less revenue from company restaurant sales and any increase in general and
administrative expenses may have a greater impact on our financial condition and business results. While our franchise
agreements are designed to maintain brand consistency, this increase in the franchised-operated restaurants reduces our direct
day-to-day control over these restaurants and may expose us to risks not otherwise encountered if we maintained ownership
and control of the restaurants. These risks include franchisee defaults on their obligations to us arising from financial or other
difficulties encountered by them, such as payments to us or maintenance and improvement obligations; limitations on
enforcement of franchise obligations due to bankruptcy or insolvency proceedings; unwillingness of franchisees to support our
marketing programs and strategic initiatives; inability to participate in business strategy changes due to financial constraints;
inability to meet rent obligations on leases on which we retain contingent liability; failure to operate restaurants in accordance
with required standards; failure to report sales information accurately; efforts by one or more large franchisees or an organized
franchise association to cause poor franchise relations; and failure to comply with food quality and preparation requirements
subjecting us to potential losses even when we are not legally liable for a franchisee's actions or failure to act. Although we
believe that our current relationships with our franchisees are generally good, there can be no assurance that we will maintain
strong franchise relationships. Our dependence on franchisees could adversely affect us, our reputation and our brands, and
could adversely affect our business, financial condition and results of operations.