Zoom Past Legal Zoom – Revisited

Years ago now I wrote a post called Zoom Past Legal Zoom. For years it has been one of the most read posts on this site and no post on the site has more comments. In that post I talked about how Legal Zoom does NOT give out legal advice and how the company’s documents are not guaranteed to be correct, complete, or up-to-date. I also talked about how many people may be surprised at the expense comparison between Legal Zoom and business lawyers, particularly here in Iowa. I think most prospective clients would find that many Iowa lawyers charge comparable fees to Legal Zoom in setting up a corporation or LLC.

Of course that has not stopped millions of Americans who have engaged in using Legal Zoom’s "self-help" services and I’ll be the first to admit that the company has done a great job at marketing. Legal Zoom has also withstood several challenges in various states alleging the company engages in the unauthorized practice of law. One such challenge occurred in South Carolina where recently a judge found that the company did not engage in the unauthorized practice of law and the Supreme Court of South Carolina signed off on his recommendation. But the judge’s words are very telling and actually should serve as a warning to consumers:

“LegalZoom’s software acts at the specific instruction of the customer and records the customer’s original information verbatim, exactly as it is provided by the customer,” Newman wrote in the report, adding that its “does not exercise any judgment or discretion, but operates automatically in the same fashion as a ‘mail merge’ program.” 

I know many lawyers are upset about the inroads that Legal Zoom has made into many areas of the practice of law, not just business law. But the judge’s words above are stinging to Legal Zoom in my opinion. Does a software that offers no judgment or discretion, but operates automatically in the same fashion as a ‘mail merge’ program protect the public? There is no doubt people who use Legal Zoom are missing out on three key areas of knowledge that lawyers bring to the table. (Hat tip to Jay Shepherd as he explained what lawyers really sell in his talk at Ignite Law 2011).

  1. Substantive knowledge – this is the knowledge about the law. 
  2. Procedural knowledge – this is knowledge about the rules. What do you file? Where do you file? Where else do I need to register? Do I need licenses? Do I need to register with other state agencies? Do I also file at the county level? There is more to setting up a business than simply filing articles of incorporation or a certificate of organization. 
  3. Judgment – this is most important. This is why lawyers will always have a job in my opinion. Unlike Legal Zoom lawyers don’t sell documents. We sell judgment. Should you form a corporation or LLC? S corp or c corp? Should you just stay a sole proprietorship? What are the tax consequences? Is the name I am considering for my business one that won’t get me in a lawsuit from the outset? These and dozens of other questions are why it is important to hire a lawyer. Plus, it is critical to form relationships with professionals that can help your business including reputable accountants, bankers and insurance representatives. Lawyers can help you make these contacts. Legal Zoom does not.

So again I say:

Use LegalZoom if you must but I highly recommend talking to an attorney before you go that route.  You might be surprised by the expense comparison, and even if the cost is slightly more, the legal advice is usually worth it.  As the saying goes, you can pay now or pay later.  The choice is up to you.



Listening Could Help Avoid Business Lawsuits

A blog post came to me after talking with an acquaintance last night. The acquaintance initially asked me a question but he really didn’t want to hear my answer. Instead, he wanted to tell me his news. Rather than listen to me he just wanted to talk. That was fine and I let him do so. He never really acknowledged the answer I had given to him to his question because he was too busy talking.

It seems to me the lack of truly listening is why a lot of business litigation occurs. And all that talk can be costly. Studies have shown that litigation transaction costs (excluding judgments and settlements) is on the rise every year to the tune of several billion dollars. And remarkably this isn’t because of increased hourly rates on the part of law firms as the data shows that there has been little change in legal hourly rates over time.

How can a business control these costs? I’ll go with listen more and talk less. Mediation (where both sides sit down with an impartial third party to hopefully settle differences) is a great example of a process that often works to reduce the costs and risks of going to trial. But all too often mediation doesn’t occur until a long ways into the litigation process. As a case nears trial the parties become more willing to negotiate because the risk of trial (and potentially losing) begins to loom. But rarely are cases settled by mediation prior to litigation.

So why not mediate earlier in the process? What I often hear is that the parties "are not ready" to mediate. The parties "don’t understand" the other party’s position. Or, they don’t understand or fail to acknowledge the "downside" to their own cases early in the litigation process. Is this really so? I don’t think so. If we spent more time listening, and I mean truly listening rather than just waiting to talk, parties could be ready to mediate and/or resolve their differences at an early stage and could save lots of money in the process.

Don’t get me wrong. There are times when you need to litigate. Particularly when the other side isn’t willing to listen. But try this in your next dispute. Pick up the phone and call the other side at the very outset of the process. (Don’t email). See if they are willing to meet and discuss the dispute. Go with the intention to listen and see if there is a middle ground. Perhaps consider mediation initially rather than waiting until the parties have spent an arm and a leg on pleadings, motions and discovery.

As Abraham Lincoln said,

"Discourage litigation. Persuade your neighbours to compromise when you can. Point out to them how the nominal winner is often a real loser – in fees, and expenses, and waste of time. As a peace maker, the lawyer has a superior opportunity of being a good man. There will still be business enough. Never stir up litigation. A worse man can scarcely be found than one who does this."

 I could not have said it better myself, except by adding listening to the equation.

Asset Purchase Sale? Check out Unemployment History of Seller

Business buyers enter into asset purchase sales to avoid taking on the liabilities and debts of the seller. In Iowa, asset purchase buyers may be surprised to learn that under many circumstances the buyer will have successor liability with respect to the seller’s reserve account for the purposes of unemployment. This means the buyer inherits the unemployment history of the seller, good or bad, and is essentially responsible for unemployment benefits to employees, even if those employees were terminated just prior to the buyer taking over.

Seem strange? Well, it runs against the typical notion that purchasing business via an asset purchase and setting up a new business entity as a buyer insulates you from the liability of the seller. But, the Iowa Administrative Rules read:

Whenever any employing unit in any manner succeeds to or acquires from an employer either the organization,trade or business or substantially all the assets thereof, and continues such organization, trade or business such employing unit shall notify the department for the purpose of accomplishing the transfer or the reserve account of the predecessor employer to the successor employing unit. Such notification must be in writing on Form 60-0126, Report to Determine Liability, and include the name and address of the predecessor, the date of acquisition, and the name and address of the successor. When such notice has been received or in the absence of the notice when necessary information establishing that the acquisition occurred has been received by the department, the actual contribution and benefit experience and taxable payrolls of the predecessor shall be transferred to the successor employing unit for determining its rate of contribution, Thereafter, benefits chargeable because of employment for such transferred organization, trade or business shall be charged to the account of the successor.

So if you are purchasing a business from a seller, be sure to check out the seller’s unemployment compensation history, even if you are setting up a new corporation and buying only the assets of the business. If the history is poor, you may want to use this as a negotiating chip in determining the purchase price. You will also want to make sure all unemployment debts have been paid by the seller so that you are not hit with a surprise bill as soon as you take over.

You should consult your business attorney and/or accountant regarding these and other matters when entering into an asset purchase of a business.


5 Reasons to Hire a Franchise Attorney

 It goes without saying considering I am a franchise lawyer, but I agree completely with the Franchise King who offered his Top 5 Reasons to Hire a Franchise Attorney in a recent post.

In my experience a lot of prospective franchisees skimp on hiring a franchise lawyer to review their FDD and franchise agreement. Many of those people seem to have serious misunderstandings about their rights and exactly what the franchise agreement says. I’ll never understand how someone can invest their life savings in a business without legal advice. Interestingly, people tend to get legal advice when they buy independent businesses but the lure of franchising seems to gives prospects a comfort level that should not exist. Franchised businesses tend to fail at the same rate as independent businesses. Don’t buy a franchise without legal representation. It’s a big mistake!

Thanks to The Franchise King, Joel Libava, for the post.


Prospective Franchisees Need to Research Further Than FDD for Details

I read an interesting article from Entrepreneur on the Key to Understanding a Company’s FDD (franchise disclosure document). It’s an article I’d recommend prospective franchisees read but they better be prepared to go deeper if they really want to understand a Company’s FDD. The author recommends checking three key sections of the FDD:

  1. Item 3 – Litigation;
  2. Item 19 – Earnings Claims;
  3. Item 20 – Turnover. 

While I agree in principle that these are three key areas of the FDD to understand, the reality is that these areas (particularly the items regarding litigation and earnings claims) often shed little light on the franchise offering. The problem is most FDDs provide very little detail regarding litigation and many franchisors still refuse to make earnings claims although according to the article it appears franchisors are increasingly providing earnings claims at least among the Entrepreneur Franchise 500.

Consequently, if you hope to learn more about the franchise offering you’ll need to research further than just the FDD. You’ll need to have in depth discussions with management and other franchisees. Come loaded with detailed questions. The FDD should not be your ending point in your research. It is really just the beginning. 

Selling or Buying a Business: Pay Attention to Why Deals Don’t Close

Steve Sink wrote recently wrote a blog post on IowaBiz covering Why Deals do not Close. I recommend buyers and sellers of businesses to read the post. Fortunately, most of the deals I work on tend to close but from time to time there are issues with a deal or perhaps even litigation after a deal closes.

One of the biggest reasons I’ve seen that hampers a deal is when a buyer or seller has an unrealistic view of the sales price. This is particularly true for a seller. While I understand the notion that you want the best price possible, a seller should understand that it is important to have the transaction be a win/win. A Seller should want the buyer to be successful (particularly if seller financing is involved). Unfortunately there are lots of times that the seller, or maybe the Seller’s advisors, don’t understand this concept.  Even if your deal closes, you may run into litigation issues if the business is priced too high which will eat into the proceeds of the sales price.

Want your deal to close without litigation on the back end? Don’t be greedy. Be sure to read the rest of Steve’s list

Careful Planning Necessary When Using Retirement Monies to Fund Startup Business

Accountant Joe Kristan of Roth & Co. has an informative post on the IowaBiz Blog discussing the dangers of using IRA retirement monies to fund a startup business.  In the situation described, a would-be entrepreneur took about $320,000 from his 401K and rolled it into a self-directed IRA. From there, the entrepreneur invested almost all the funds into a new corporation. The IRS said this was a prohibited transaction that made the entire $320,000 immediately taxable. The tax court agreed and the entrepreneur owed $163,123 in taxes and penalties.

Many prospective franchisees choose to fund their new franchise purchase by using retirement funds. Franchise consultant Joel Libava asked in a blog post whether it is getting riskier to use your 401K to fund your start up business. Libava’s post is a good one and he says he is comfortable with the plans if the paperwork is "perfect" and the business owner is in a good position to leverage his or her plan. But it’s pretty clear that if you are considering the use of retirement monies to fund your business startup, you must be sure to plan carefully and seek advice from knowledgeable tax and legal advisors.

Some advisors like accountant Joe Kristan still are not hip on the idea saying,

They are at best a startup funding source of last-resort — and if your business plan requires them, you might want to reconsider your business plan.

So be careful if you choose to fund your start up business with retirement monies. And if you have questions on tax and business issues I’d highly recommend Joe Kristan’s Tax Updates Blog for other timely and informative articles.

Vote ‘Yes’ to Renovate and Update Polk County Courthouse

I generally try to stay away from politics on this blog but there is an important vote on November 5th regarding Measure A:  The Polk County Public Safety Judicial System Bond. I encourage you to vote ‘Yes" for this measure.

Our Polk County Courthouse has been in use for over 100 years. While it is an architectural gem it is also badly in need of updating.  Most importantly, it is not adequately designed for security and safety needs. Violent criminals often roam the same halls with the public including jurors and children.  Also, there are numerous courtrooms crowded into the facility that were not designed for that purpose. Polk County is the busiest courthouse in the state. It was originally designed for just four courtrooms but now houses over 20 courtrooms in an effort to meet the needs of the public.

The old adage is that you can pay now or pay later. If we don’t pass this measure the costs will be substantially higher down the road. At some point in the near future you can be assured that the courthouse will be overhauled or perhaps a new one built. We cannot avoid that fact much longer. It is an absolute necessity.  A smarter approach would be to approve the measure now. The cost is approximately $1.50 per month for the average homeowner. It is a small price to pay to ensure fairness and to keep our families safe.

Again, please vote ‘Yes’ on this important measure. 


Buying a Franchise: Consider Internet Retailing Encroachment

Franchisors often tout that they are selling an "exclusive territory" to a franchisee during the sales process. Franchisees generally want an exclusive territory because they believe this protects them from competition from other franchisees or the franchisor itself. But if you are a franchise who has been sold an exclusive territory, you better make sure you know what you are really buying.

Many franchise agreements contain a clause that allows the franchisor to reserve certain rights with respect to the territory granted to the franchisee. If your prospective franchise agreement contains a reservation of rights to the franchisor allowing it to conduct sales using different methods, it is not truly an "exclusive" territory. More often than not, franchisors will reserve the right to sell products and/or services online IN YOUR "EXCLUSIVE" TERRITORY. This has become even bigger in recent years as many retailers are now conducting sales and/or marketing  using social media and mobile apps.

Be sure to review the territory provisions in the franchise disclosure document (FDD) and franchise agreement with an eye toward whether the franchisor or other franchisees are able to conduct Internet, social media and/or mobile retailing. In many instances the franchisor will have a Web site, social media applications and mobile apps but franchisees are not permitted to conduct online retailing. This is problematic for a couple of reasons. First, if the franchisee is unable to conduct online retailing this takes away a significant marketing opportunity generally available to independent retail businesses. Second, if the franchisor conducts online retailing, and markets to the franchisee’s customers or prospective customers (sometimes at lower prices than offered by the franchisee), this could harm the franchisee’s ability to sell in their own territory.

As a prospective franchisee you need to have discussions regarding these issues when you are in the sales process with the franchisor. If you’re told "we won’t do that" by the franchisor, then make sure to get that promise in writing. If it’s not in writing, such statements generally won’t protect the franchisee if the franchisor later changes course and begins to compete against the franchisee through e-commerce.

The fine print is important when it comes to the territorial provisions of the franchise agreement. It is entirely possible, even with an "exclusive" territory, that you could face serious competition from the franchisor or other franchisees that you never expected when you bought the franchise. Know what you’re getting with your franchise and ask questions during the sales process. Territorial reservation of rights needs to be a factor when deciding to purchase a franchise.

Government Shutdown Teaches Lessons in Negotiation

 I read an interesting blog post on the LexBlog Network from Tom Crane of the San Antonio Employment Law Blog called What We Can Learn from the Government Shutdown. The lesson Crane preaches that bullying tactics usually do not work very well in negotiation and tend to invite an equal response from the other side.

I agree with Crane regarding the fact that bullying tactics don’t work well in negotiations. In my view there a couple of things you should remember in your next business negotiation. First, you need to leave some room for the other side to save face. This is true even if you have the upper hand and likely don’t need to give in to the other side’s demands. People need to feel as though they have gotten something from you. How can this be accomplished? One of the easiest ways is to have throw away points in the negotiation that you are willing to give up. So even if these points aren’t important to you, the other side can still feel like they received something in return for their compromise.

Secondly, don’t use ultimatums or say that you will "never" do something unless you really mean it. And even if you do mean it, it still is not the best idea to use this strategy. Ultimatums and saying you will "never" agree to something invites the same strategy in return. Such techniques build roadblocks to compromise and a successful negotiation.

A key is to disagree without being disagreeable. Something our politicians desperately need to learn.