Baskin Robbins 2015 Annual Report Download - page 30

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We are subject to a variety of additional risks associated with our franchisees.
Our franchise system subjects us to a number of additional risks, any one of which may impact our ability to collect royalty
payments from our franchisees, may harm the goodwill associated with our brands, and/or may materially and adversely impact
our business and results of operations.
Bankruptcy of U.S. Franchisees. A franchisee bankruptcy could have a substantial negative impact on our ability to collect
payments due under such franchisee’s franchise arrangements and, to the extent such franchisee is a lessee pursuant to a
franchisee lease/sublease with us, payments due under such franchisee lease/sublease. In a franchisee bankruptcy, the
bankruptcy trustee may reject its franchise arrangements and/or franchisee lease/sublease pursuant to Section 365 under the
United States bankruptcy code, in which case there would be no further royalty payments and/or franchisee lease/sublease
payments from such franchisee, and there can be no assurance as to the proceeds, if any, that may ultimately be recovered in a
bankruptcy proceeding of such franchisee in connection with a damage claim resulting from such rejection.
Franchisee Changes in Control. The franchise arrangements prohibit “changes in control” of a franchisee without our consent
as the franchisor, except in the event of the death or disability of a franchisee (if a natural person) or a principal of a franchisee
entity. In such event, the executors and representatives of the franchisee are required to transfer the relevant franchise
arrangements to a successor franchisee approved by the franchisor. There can be, however, no assurance that any such
successor would be found or, if found, would be able to perform the former franchisee’s obligations under such franchise
arrangements or successfully operate the restaurant. If a successor franchisee is not found, or if the successor franchisee that is
found is not as successful in operating the restaurant as the then-deceased or disabled franchisee or franchisee principal, the
sales of the restaurant could be adversely affected.
Franchisee Insurance. The franchise arrangements require each franchisee to maintain certain insurance types and levels.
Certain extraordinary hazards, however, may not be covered, and insurance may not be available (or may be available only at
prohibitively expensive rates) with respect to many other risks. Moreover, any loss incurred could exceed policy limits and
policy payments made to franchisees may not be made on a timely basis. Any such loss or delay in payment could have a
material and adverse effect on a franchisee’s ability to satisfy its obligations under its franchise arrangement, including its
ability to make royalty payments.
Some of Our Franchisees are Operating Entities. Franchisees may be natural persons or legal entities. Our franchisees that are
operating companies (as opposed to limited purpose entities) are subject to business, credit, financial, and other risks, which
may be unrelated to the operations of the restaurants. These unrelated risks could materially and adversely affect a franchisee
that is an operating company and its ability to make its royalty payments in full or on a timely basis, which in turn could
materially and adversely affect our business and operating results.
Franchise Arrangement Termination; Nonrenewal. Each franchise arrangement is subject to termination by us as the franchisor
in the event of a default, generally after expiration of applicable cure periods, although under certain circumstances a franchise
arrangement may be terminated by us upon notice without an opportunity to cure. The default provisions under the franchise
arrangements are drafted broadly and include, among other things, any failure to meet operating standards and actions that may
threaten our licensed intellectual property.
In addition, each franchise agreement has an expiration date. Upon the expiration of the franchise arrangement, we or the
franchisee may, or may not, elect to renew the franchise arrangements. If the franchisee arrangement is renewed, the franchisee
will receive a “successor” franchise arrangement for an additional term. Such option, however, is contingent on the franchisee’s
execution of the then-current form of franchise arrangements (which may include increased royalty payments, advertising fees,
and other costs), the satisfaction of certain conditions (including modernization of the restaurant and related operations), and
the payment of a renewal fee. If a franchisee is unable or unwilling to satisfy any of the foregoing conditions, the expiring
franchise arrangements will terminate upon expiration of the term of the franchise arrangements.
Product Liability Exposure. We require franchisees to maintain general liability insurance coverage to protect against the risk of
product liability and other risks and demand strict franchisee compliance with health and safety regulations. However,
franchisees may receive through the supply chain (from central manufacturing locations (“CMLs”), NDCP, or otherwise), or
produce defective food or beverage products, which may adversely impact our brands’ goodwill.
Americans with Disabilities Act. Restaurants located in the United States must comply with Title III of the Americans with
Disabilities Act of 1990, as amended (the “ADA”). Although we believe newer restaurants meet the ADA construction
standards and, further, that franchisees have historically been diligent in the remodeling of older restaurants, a finding of
noncompliance with the ADA could result in the imposition of injunctive relief, fines, an award of damages to private litigants,
or additional capital expenditures to remedy such noncompliance. Any imposition of injunctive relief, fines, damage awards, or
capital expenditures could adversely affect the ability of a franchisee to make royalty payments, or could generate negative
publicity, or otherwise adversely affect us.