Wendy's 2009 Annual Report Download - page 24

Our financial results are affected by the operating results of franchisees.
As of January 3, 2010, approximately 79% of the Wendy’s system and 69% of the Arby’s system were
franchise restaurants. We receive revenue in the form of royalties, which are generally based on a percentage of
sales at franchised restaurants, rent and fees from franchisees. Accordingly, a substantial portion of our financial
results is to a large extent dependent upon the operational and financial success of our franchisees. If sales
trends or economic conditions worsen for franchisees, their financial results may worsen and our royalty, rent
and other fee revenues may decline. In addition, accounts receivable and related allowance for doubtful accounts
may increase. When company-owned restaurants are sold, one of our subsidiaries is often required to remain
responsible for lease payments for these restaurants to the extent that the purchasing franchisees default on
their leases. During periods of declining sales and profitability of franchisees, such as are currently being
experienced by a significant number of Arby’s franchisees and some Wendy’s franchisees, the incidence of
franchisee defaults for these lease payments increases and we are then required to make those payments and seek
recourse against the franchisee or agree to repayment terms. Additionally, if franchisees fail to renew their
franchise agreements, or if we decide to restructure franchise agreements in order to induce franchisees to renew
these agreements, then our royalty revenues may decrease. Further, we may decide from time to time to acquire
restaurants from franchisees that experience significant financial hardship, which may reduce our cash and
equivalents and/or increase our notes receivable from franchisees.
Each brand may be unable to manage effectively the acquisition and disposition of restaurants, which
could adversely affect our business and financial results.
Each brand acquires restaurants from franchisees and in some cases “re-franchises” these restaurants by
selling them to new or existing franchisees. The success of these transactions is dependent upon the availability
of sellers and buyers, the availability of financing, and the brand’s ability to negotiate transactions on terms
deemed acceptable. In addition, the operations of restaurants that each brand acquires may not be integrated
successfully, and the intended benefits of such transactions may not be realized. Acquisitions of franchised
restaurants pose various risks to brand operations, including:
•diversion of management attention to the integration of acquired restaurant operations;
•increased operating expenses and the inability to achieve expected cost savings and operating
efficiencies;
•exposure to liabilities arising out of sellers’ prior operations of acquired restaurants; and
•incurrence or assumption of debt to finance acquisitions or improvements and/or the assumption of
long-term, non-cancelable leases.
In addition, engaging in acquisitions and dispositions places increased demands on the brand’s operational
and financial management resources and may require us to continue to expand these resources. If either brand is
unable to manage the acquisition and disposition of restaurants effectively, its business and financial results
could be adversely affected.
ARG does not exercise ultimate control over advertising for its restaurant system, which could harm
sales and the brand.
Arby’s franchisees control the provision of national advertising and marketing services to the Arby’s
franchise system through the AFA, a company controlled by Arby’s franchisees. Subject to ARG’s right to
protect its trademarks, and except to the extent that ARG participates in the AFA through its company-owned
restaurants, the AFA has the right to approve all significant decisions regarding the national marketing and
advertising strategies and the creative content of advertising for the Arby’s system. Although ARG has entered
into a management agreement pursuant to which ARG, on behalf of the AFA, manages the day-to-day
operations of the AFA, many areas are still subject to ultimate approval by the AFA’s independent board of
directors, and the management agreement may be terminated by either party for any reason upon one year’s
prior notice. See “Item 1. Business—The Arby’s Restaurant System—Advertising and Marketing.” In addition,
local cooperatives run by operators of Arby’s restaurants in a particular local area (including ARG) make their
own decisions regarding local advertising expenditures, subject to the requirement to spend at least the
specified minimum amounts. ARG’s lack of control over advertising could hurt sales and the Arby’s brand.
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