IHOP 2015 Annual Report Download - page 25

5
Franchising
Franchisee Relationships
We highly value good relationships with our IHOP and Applebee's franchisees 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 Brand Council (“FBC”), which consists of eight franchisee representatives. 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 13 IHOP franchisees. The Applebee's
FBC and the IHOP FLC assist Applebee's and IHOP senior management in key areas of the business, including franchise
marketing, menu development, information technology, operations 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 initial development periods 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 a development fee equal to $10,000 for
each Applebee's restaurant that the franchisee contracts to develop and an initial franchisee fee of $35,000 for each restaurant
developed (against which the $10,000 development fee will be credited) 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 franchise
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 limited 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.
We have the contractual right, subject to state law, to terminate a franchise agreement for a variety of reasons, including, but
not limited to, a franchisee’s failure to make required payments when due or failure to adhere to specified Company policies and
standards.