What looks like a big corporation is often a privately held business in the form of a franchise. Franchises are all over. Restaurants, hotels, auto dealerships, gyms, real estate brokerages, home-services companies, and so many other businesses operate under franchise systems. These franchisees own that business (under a lot of conditions) and that business has value that must be determined in an Illinois divorce. How Are Franchises Valued And Divided In An Illinois Divorce? When a spouse owns a franchise, putting a value on the business for an Illinois divorce is not as easy as valuing an independently owned store, restaurant, or service company. A franchisee is an independent business owner, but the franchisee operates under rights granted by somebody else. The Illinois Franchise Disclosure Act defines a “franchise” as a contract or agreement, “either expressed or implied, whether oral or written,” that satisfies three requirements. 815 ILCS 705/3(1). The franchisee first must be granted the right to offer, sell, or distribute goods or services “under a marketing plan or system prescribed or suggested in substantial part by a franchisor.” 815 ILCS 705/3(1)(a). Second, the operation of the franchisee’s business under that system must be “substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol.” 815 ILCS 705/3(1)(b). Finally, the franchisee must be required to pay the franchisor or its affiliate, directly or indirectly, “a franchise fee of $500 or more.” 815 ILCS 705/3(1)(c). These contractual rights can be valuable. They can also be temporary, limited, expensive to maintain, and hard to transfer. Business Valuation Resources summarizes this distinction: “Franchises are contract rights, not outright ownership.” Business Valuation Resources, Franchise Value: Valuation Methods and Benchmarking Data 23 (2016). The franchisee does not own the franchisor’s trade names, logos, production rights, or production systems. Id. Instead, “[w]hatever benefits exist to the franchisee are found in the franchise agreement.” Id. That is an important distinction in an Illinois divorce. Under the Illinois Marriage and Dissolution of Marriage Act, when valuing property for purposes of division, “the court shall employ a fair market value standard.” 750 ILCS 5/503(k). For a franchise, determining fair market value requires more than looking at the franchisee’s revenue or applying a generic industry multiple. The valuation must determine what the spouse owns, what economic benefits those rights produce, how long those rights are expected to continue, and what a hypothetical buyer could […]
