Whether it is McDonald’s, Jiffy Lubes or Verizon stores, Americans love a trusted brand. All of us enjoy the promise of consistent quality a branded business provides…even if we have never used that particular location before. Small business people become franchisees of these brands to happily enjoy the goodwill of the brands.
The use of a brand and/or business system by different small business people is governed by the concept of a franchise.
A franchise is a “grant of the sole right of engaging in a certain business or in a business using a particular trademark in a certain area.” Black’s Law Dictionary (11th ed. 2019)
A franschisor is “someone who grants a franchise.” Black’s Law Dictionary (11th ed. 2019)
A franchisee is “someone who is granted a franchise.” Black’s Law Dictionary (11th ed. 2019)
When a small businessperson becomes a franchisee they are entering into a contract with the franchisor. The franchisor will have done due diligence to be sure that the franchisee is a worthy of representing the franchise’s brand. A franchisor, however, will not know how strong a franchisee’s marriage is today…or in the future.
If a franchisee’s marriage ends in divorce, the franchisor might find themselves with a variety of problems: the spouse could now be a new partner in the franchise or there might be two ongoing (and uncertain) debtors to the franchisor.
To eliminate the risks to the franchisor associated with a franchisee divorce, franchisors have their franchisee and the franchisee’s spouse sign spousal guaranties and spousal consents. These franchisee spouse guaranties and franchisee spousal consents govern the award of the business’s assets, income and debts in an Illinois divorce.
Franchise spousal guaranties and spousal consents are usually the same document but distinguishing between the two concepts better explains the spouse’s relationship to a franchise post-divorce.
Franchise Spousal Guaranties In Illinois
Buying into a franchise usually requires money up front and ongoing payment. A spousal guaranty is means both spouses are making a promise to the franchisor of their assets.
Otherwise, the franchisee could just say “I don’t have the money. I gave it to my wife,” thereby requiring the franchisor to prosecute a fraudulent conveyance action against the spouse to get their money.
A franchise’s spousal guaranty also keeps both spouses on the hook for obligations after divorce (unless one spouse indemnifies the other spouse for those obligations).
Franchise Spousal Consent In Illinois
A franchisee’s spousal consent binds the franchisee’s spouse to the same terms as the franchisee not withstanding divorce. With a spousal consent, the franchisee’s spouse has the same duty to not hurt the franchise that the franchisee has.
A spousal consent will almost always require both spouses to agree to a covenant not to compete with the franchisor. One can imagine a spouse working with the franchisee and then opening up a “Mrs. McDonalds” across the street post-divorce much to the chagrin of the franchisor.
Without a spousal covenant not to compete, a more duplicitous and/or clever ex-spouse could simply buy the business from the franchisee and begin operating the business with no contractual obligation to the franchisor.
Additionally, a spousal consent is effectively a post-nuptial agreement entered into by the married couple in regards to their relationship with the franchisor.
“[I]t is well settled that a mutual release of property rights by a husband and wife is adequate consideration to support a post-nuptial agreement.” In re Estate of Brosseau, 531 NE 2d 158 – Ill: Appellate Court, 3rd Dist. 1988
Contracts between spouses have to be sufficiently detailed. The franchisor is going to provide a contract that guarantees that.
“For the contract to be enforceable, the material terms must be definite and certain, meaning that the court is enabled from the terms and provisions, under proper rules of construction and applicable principles of equity, to ascertain what the parties have agreed to do.”In re Marriage of Haller, 980 NE 2d 261 – Ill: Appellate Court, 5th Dist. 2012
Once deemed valid, an agreement between spouses is enforceable upon divorce.
“Property settlement agreements, which have been assented to by both parties, may not be cancelled solely because one party withdraws his assent prior to the entry of the judgment; a settlement agreement should not be disregarded simply because one party has second thoughts.” IN RE MARRIAGE OF STOKER AND STOKER, 2021 IL App (5th) 200301 – Ill: Appellate Court, 5th Dist. 2021
Typically, businesses acquired by spouses are marital assets and, thus, are divisible in an Illinois divorce.
“The business interest of a spouse acquired subsequent to marriage constitutes `marital property’ subject to equitable distribution upon dissolution.” In re Marriage of Schneider, 343 Ill.App.3d 628, 634, 278 Ill.Dec. 485, 798 N.E.2d 1242 (2003)
A spousal consent acknowledges whether the franchisees interests in the franchise will be marital (divisible) or non-marital (non-divisible) in a a divorce. If the ownership in the franchise is deemed marital, the couple can agree in advance as to how that interest will be divided in a divorce.
“Distribution of a business interest can present difficulties, and the court should be mindful that divorcing parties might be unable to work together in a continued business association.” In re Marriage of Schlichting, 19 NE 3d 1055 – Ill: Appellate Court, 2nd Dist. 2014
You can very rarely own half a small business. Illinois divorce courts and spousal consent agreements both usually award the business to the franchisee.
“[W]hen the property at issue is a small business and the parties have shown that they cannot work together, it is better to award the business solely to one party or the other.” In re Marriage of Thomas, 608 NE 2d 585 – Ill: Appellate Court, 3rd Dist. 1993
Upon divorce, the franchisee’s spouse can get a pay-out equal to an equitable share of the business. The business’s value can be determined by the spousal consent agreement or (more likely) the value of the business can be determined later when the divorce actually happens.
Illinois divorce courts divide assets equitably. Illinois divorce courts consider each party’s work outside and inside the home when dividing assets. Illinois divorce courts“shall divide the marital property without regard to marital misconduct in just proportions considering all relevant factors, including:
(1) each party’s contribution to the acquisition, preservation, or increase or decrease in value of the marital or non-marital property, including… (ii) the contribution of a spouse as a homemaker or to the family unit; and (iii) whether the contribution is after the commencement of a proceeding for dissolution of marriage…750 ILCS 5/503(d)(1)
Those contributions are balanced by considering “any prenuptial or postnuptial agreement of the parties” 750 ILCS 5/503(d)(7). A franchise spousal consent would be considered a postnuptial agreement.
Multiple Franchises In An Illinois Divorce
Successful franchisees usually start more franchises. If all of the franchises were started during the marriage, then all of the franchises are marital and, thus, divisible in an Illinois divorce.
When some of the franchise businesses were started before the marriage and other franchise businesses were started after the marriage, the franchise businesses that were opened before the marriage may be classified as non-marital and thus remain with the franchisee post-divorce.
“[T]he following…which is known as “non-marital property”… (6) property acquired before the marriage” 750 ILCS 5/503(a)(6)
It is not that difficult to distinguish between the individual businesses that were started before the marriage and the businesses that were started after the marriage.
“[A franchisee’s spouse’s] contention that [the franchisee] has “commingled” the new stores with the old and that all the stores have thereby become marital property is unpersuasive. The stores are sufficiently separable so that there is no practical necessity to treat them as a unit. More importantly, the fact that [the franchisee] put the new stores into the old corporations does not evince an intent to donate the old stores to the marriage.” In re Marriage of Kennedy, 418 NE 2d 947 – Ill: Appellate Court, 1st Dist. 1981
Furthermore, if the franchises that were started after the marriage were purchased using premarital funds from the older businesses, those newer businesses may be non-marital property as well.
“[T]he following…which is known as “non-marital property”…8) income from property acquired by a method listed in paragraphs (1) through (7) of this subsection if the income is not attributable to the personal effort of a spouse.” 750 ILCS 5/503(a)” 750 ILCS 5/503(a)(8)
In fact patterns where it is difficult to determine if a business is non-marital or marital property, that business will likely be labelled as marital property.
“Any doubt as to the nature of the property must be resolved in favor of the finding that it is marital” In re Marriage of Steel, 2011 IL App (2d) 080974
If a business is deemed marital property, a court can always award either party a bigger share based on “each party’s contribution to the acquisition, preservation, or increase or decrease in value of the marital or non-marital property” 750 ILCS 5/503(d)(1)
A Spouse’s Duty To The Franchise After Signing A Spousal Guaranty Or A Spousal Consent
A spouse is not merely promising to not do anything bad to the franchise by signing a spousal guaranty or a spousal consent. A spouse may have a lot of affirmative duties, including owing debts to the franchisor.
Spouses may claim that they do not understand the business dealings of their spouses, but a franchisee’s spouse will be bound to contracts with that business. There is a “well-known principle that competent adults are presumed to know the nature of contracts to which they sign their names.” UNION NAT’L BK & TRUST CO. v. Carlstrom, 481 NE 2d 300 – Ill: Appellate Court, 3rd Dist. 1985
The franchisee may use the spousal guarantee as leverage against their spouse in divorce negotiations. Being bound to an agreement that a spouse does not understand about a business that a spouse doesn’t understand sounds very intimidating.
If you are a franchisee or a franchisee’s spouse, you must know how the spousal guaranties and spousal consents you signed will affect your Illinois divorce. Contact my Chicago, Illinois family law firm to speak with an experienced Illinois divorce attorney today.