Wendy's 2012 Annual Report Download - page 10

Franchised Restaurants
As of December 30, 2012, Wendy’s franchisees operated 4,759 Wendy’s restaurants in 49 states, the District of
Columbia and Canada.
The rights and obligations governing the majority of franchised restaurants operating in the United States are
set forth in the Wendy’s Unit Franchise Agreement (non-traditional locations may operate under an amended
agreement). This document provides the franchisee the right to construct, own and operate a Wendy’s restaurant
upon a site accepted by Wendy’s and to use the Wendy’s system in connection with the operation of the restaurant at
that site. The Unit Franchise Agreement provides for a 20-year term and a 10-year renewal subject to certain
conditions. Wendy’s has in the past franchised under different agreements on a multi-unit basis; however, Wendy’s
now generally grants new Wendy’s franchises on a unit-by-unit basis.
The Wendy’s Unit Franchise Agreement requires that the franchisee pay a royalty of 4% of monthly sales, as
defined in the agreement, from the operation of the restaurant or $1,000, whichever is greater. The agreement also
typically requires that the franchisee pay Wendy’s an initial technical assistance fee. In the United States, the standard
technical assistance fee required under a newly executed Unit Franchise Agreement is currently $25,000 for each
restaurant.
The technical assistance fee is used to defray some of the costs to Wendy’s in providing technical assistance in
the development of the Wendy’s restaurant, initial training of franchisees or their operator and in providing other
assistance associated with the opening of the Wendy’s restaurant. In certain limited instances (like the regranting of
franchise rights or the relocation of an existing restaurant), Wendy’s may charge a reduced technical assistance fee or
may waive the technical assistance fee. Wendy’s does not select or employ personnel on behalf of franchisees.
Wendy’s Restaurants of Canada Inc. (“WROC”), a 100% owned subsidiary of Wendy’s, holds master franchise
rights for Canada. The rights and obligations governing the majority of franchised restaurants operating in Canada are
set forth in a Single Unit Sub-Franchise Agreement. This document provides the franchisee the right to construct,
own and operate a Wendy’s restaurant upon a site accepted by WROC and to use the Wendy’s system in connection
with the operation of the restaurant at that site. The Single Unit Sub-Franchise Agreement provides for a 20-year
term and a 10-year renewal subject to certain conditions. The sub-franchisee pays to WROC a monthly royalty of 4%
of sales, as defined in the agreement, from the operation of the restaurant or C$1,000, whichever is greater. The
agreement also typically requires that the franchisee pay WROC an initial technical assistance fee. The standard
technical assistance fee is currently C$35,000 for each restaurant.
In order to promote new unit development, Wendy’s has established a franchisee assistance program for its
North American franchisees that provides (with certain exceptions) for reduced technical assistance fees and a sliding
scale of royalties for the first two years of operation for qualifying locations opened between April 1, 2011 and
December 31, 2013. In addition, WROC has established a lease guarantee program to promote new franchisee unit
development for up to an aggregate of C$5.0 million for periods of up to five years. Franchisees pay WROC a
nominal fee for the guarantee.
In order to encourage franchisees to participate in Wendy’s Image Activation program, which include
innovative exterior and interior restaurant designs for new and reimaged restaurants, Wendy’s initiated a cash
incentive program for franchisees in the third quarter of 2012. In January 2013, the program was expanded to include
variable cash incentives for Tier 1, 2, and 3 remodels and to allow for a maximum of $100,000 each, for up to three
incentives per franchisee. The cash incentive program is for the reimaging of restaurants completed in 2013 and totals
$10.0 million.
See “Management Discussion and Analysis—Liquidity and Capital Resources—Guarantees and Other
Contingencies” in Item 7 herein, for further information regarding guarantee obligations.
Franchised restaurants are required to be operated under uniform operating standards and specifications relating
to the selection, quality and preparation of menu items, signage, decor, equipment, uniforms, suppliers, maintenance
and cleanliness of premises and customer service. Wendy’s monitors franchisee operations and inspects restaurants
periodically to ensure that required practices and procedures are being followed.
See Note 6 and Note 22 of the Financial Statements and Supplementary Data included in Item 8 herein, and
the information under “Management’s Discussion and Analysis” in Item 7 herein, for further information regarding
reserves, commitments and contingencies involving franchisees.
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