FRANCHISE APPRAISALS

Whatever the details of the particular relationship with the franchisor and the franchisee, the task for the appraiser is to discover the degree to which each asset contributes to the success of the operation as a whole – a task more easily said than done.

The process begins with an understanding of the franchise relationship as defined in state law.

Under the laws of many states, a franchise relationship exists when:

• The franchisee offers, sells, or distributes goods or services under a marketing plan or system “prescribed in substantial part” by the franchisor – meaning that the latter provides the franchisee with advice and training, retains significant control over the conduct of the franchisee’s business, grants the franchisee exclusive rights to operate in a given territory, or requires the franchisee to purchase or sell a specified quantity of the franchisor’s goods or services.

• The franchisee’s business is “substantially associated” with the franchisor – meaning that the franchisee uses the franchisor’s trademark and advertising slogans to identify its business.

• The franchisee pays a franchise fee to the franchisor to engage in business plus royalties on sales and possibly payments for inventory, supplies, training, and assistance.

As these terms suggest, the relationship between franchisor and franchisee is intimate and ongoing. But since each party owns different assets but puts them to use in a joint effort, it is often not readily apparent exactly how much of the value of any given enterprise derives from each asset. Indeed, given the differences in the assets owned by the parties in the enterprise, franchisors and franchisees in many ways engage in different businesses which, however, create value when joined together.