Rush on Business : Iowa Corporate Lawyer & Attorney : Rush Nigut of Brick Gentry Law Firm : Serving Des Moines, Cedar Rapids, Davenport, & Sioux City

Joel Libava (a/k/a "The Franchise King") has a list of 20 Must-Do Things Before You Buy a Franchise. It's a great list so I thought I'd share the article with you.

The last item on his list is to "Lawyer Up". Joel explains that the franchisor has a lawyer so franchisees should too. He also says to find a franchise lawyer rather than just any business lawyer. Both are excellent pieces of advice.

My experience is that often prospective franchisees are reluctant to hire a lawyer because they don't believe the franchise agreement can be negotiated. This isn't always the case. I've worked with a number of franchisors who are willing to negotiate certain terms in their franchise agreements. Additionally, it's important to understand what certain provisions mean. For example, you may believe you have a "fully protected territory", yet the franchise agreement may have provisions that limit this territorial protection. If you are investing a substantial amount of your life savings, isn't it worth a legal review to understand exactly what it is you're buying?

But most of all I like how Joel has set out a step-by-step plan for someone to explore franchise ownership. It's not for everyone. Franchise operations fail at roughly the same rate as independent businesses. So it's critically important to look inside yourself, examine your finances carefully and choose a franchise that fits within your talents and financial means should you decide to pursue franchise ownership.

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Those interested in raising investment capital for their business, or those interested in making investments in businesses, may want to take advantage of the monthly due diligence/investor training provided by Plains Angels. 

Plains Angels is a group of Midwest angel investors that have now funded various projects here in the Midwest. The group is actively taking applications for companies seeking investment money and it appears the quality of the companies being considered is improving each month.

This month's due diligence session covers Classes of Stock and Corporate Structure. The presenters will discuss various rights offered to preferred shareholders and the impact of those rights over the long term, including liquidation preferences, preferred distributions, management rights, and the tax consequences of those rights for different entity types. The presentation will also discuss the impact of future capital raises on the angel investors depending on their rights.

This training session will be held Thursday, April 25, 2013 from 8:30 a.m. - 11:00 a.m. at the Greater Des Moines Partnership, 700 Locust Street in Downtown Des Moines. You can check out the schedule of events at https://tikly.co/plainsangels. Tickets cost $15.00 for each session.

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I recommend prospective franchisees take a look at Empire Builders which is a series of videos highlighting successful multi-unit franchisees. 

Most of the prospective franchisees that come to see me are seeking to purchase a single franchise. Many of them dream of becoming a multi-unit owners but usually lack the capital (at least initially) to make that a reality. It's interesting to hear from multi-unit owners who have been able to harness the power of the franchising model and achieve great success. It is easier said than done.

There are some great videos in the series covering topics such as: 

• Challenges for franchisees;
• Advice to new franchisees;
• Choosing the right brands and many more.

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Potential franchisees should read this article from Robert Purvin on Franchising Myth One: Franchises are Safe Investments. In the article, Purvin discusses how franchises and independent businesses fail at roughly the same rate (something discussed at length in several of my blog posts).

It's critical that prospective franchisees understand that buying a franchise will not automatically increase your chances of success. I hear time and time again from people about how franchises have a "system" and "they will help me with marketing and getting customers". It's not always the case. 

Purvin gives some good advice to help avoid mistakes when deciding whether to buy a franchise operation:

When you and your franchise attorney are reviewing the Franchise Disclosure Document, don’t limit your investigation to the closure rates. Look at the profitability of each location, especially those that serve in markets similar to yours. Do your due diligence and speak with current and past franchisees. Ask them direct questions about their profitability. It is especially critical to talk to past franchise owners and to ask them why they left the franchise. If you get any sense that the franchisees had trouble making a profit, then think very carefully before moving ahead.

Most importantly, insist that your prospective franchisor provide you with sufficient data to evaluate the profitability of the business. Limit your search to franchisors that make financial performance representations (formerly called ‘earnings claims'). There are many franchise opportunities available that are able to authentically boast high rates of success and profitability. These tend to be the top tier franchisors that require the highest investments and strictly limit their franchisee pool. As you go down the rungs of the franchising ladder to less well-known brands, new franchisors, and those with very low rates of entry, the risks typically grow.

Understanding that buying a franchise, just like starting any business, carries significant risk is the first step. You could lose your money. I see it happen to franchisees frequently. Be sure to approach buying a franchise just like it was your very own. Because in the end it will be up to you, not the system, to make it successful.
 

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If you read article after article on business law you will see "Get it in Writing" near the top of the list in advice that lawyers routinely dispense to business owners. Indeed, a quick search of this blog produced 28 entries dealing with "getting it in writing".

My experience is that many business owners would love to get their agreements in writing but they are often frightened about the cost. Some business owners will resort to self-help services but there's no substitute for a experienced business lawyer writing your agreement(s). (Self-serving but true).

So how do you effectively get a written agreement completed with the help of a lawyer? Here are a few tips:

1. Identify your goals. What are you trying to accomplish with the agreement? If you are unsure about your goals it's often more difficult for the lawyer to provide assistance.
2. Identify the most significant terms and outline them. What terms does the lawyer need to be most concerned about? If something isn't a significant risk or concern then make sure the lawyer knows that. If a particular issue isn't as important be sure the lawyer isn't engaging in a protracted negotiation on that issue with the other side.  There may also be risks you are willing to live with in order to get a deal done. Make sure your lawyer knows your thoughts on those risks. Otherwise, most lawyers are going to do everything in their power to protect you as a client and try to get you the most favorably language. Sometimes that can cause issues and problems with the other side. 
3. Try to negotiate as many terms as possible with the other party before drafting the agreement.  Lawyers love to negotiate and haggle. Therefore it is beneficial if the parties have already agreed on the terms and language on important terms. It limits the amount of negotiation a lawyer may be inclined to undertake on behalf of his or her client. It's pretty helpful for your lawyer to be able to say to the other lawyer that the parties have already agreed on that issue.

These are just a few simple tips. The key is to communicate with the lawyer. Remember it's your agreement. A good business lawyer will do his or her best to find the balance between protecting you and getting the deal done.

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* This is a guest post from Jessica Susie of the Brick Gentry Law Firm. Jessica is a registered patent attorney.

The America Invents Act, which President Obama signed into law on September 16, 2011, has been gradually overhauling the United States patent system. March 16, 2013 marked the biggest change – the United States switched from a first-to-invent to a first-inventor-to-file system. Subject to some limited exceptions, the first-inventor-to-file his patent application will be entitled to patent protection, even against an earlier inventor who later files. With the switch, the requirements for patentability have also been revised. Inventions still must be novel, nonobvious, and useful to secure patent protection. However, the definitions of what constitutes a “novel” and “nonobvious” invention are now different. In particular, the one year statutory bar, also called the grace period and on-sale bar, has changed.

Previously, an inventor had a one year grace period after disclosure of an invention in which to file his application. Disclosures included printed publications in the United States and foreign countries, public use in the United States, and sales or offers for sale in the United States. Importantly, it did not matter who made these disclosures. In practice, most businesses associated the statutory bar with their own actions – one year from putting a product on the market or publishing a journal article, the application was due. However, what many businesses and inventors may not have realized, is that the one year grace period also affected the prior art used by the United States Patent and Trademark Office (USPTO). “Prior art” is a term used in patent law to describe information that has been made available to the public and that is relevant to a particular application. It may include previous patent applications and patents, journal articles, books, and event websites. In most situations, the USPTO examined applications using prior art references dated earlier than one year prior to an application’s filing date.

However, the new one year grace period only applies to certain disclosures, namely those that originate with an inventor. The one year grace period applies if (1) the disclosure was made by an inventor or a third party who obtained the subject matter from an inventor or (2) the disclosure, although not traceable to an inventor, was made after a disclosure by an inventor or a third party who obtained the subject matter from the inventor. The policy behind these rules is the hope that they will promote early disclosure of inventions to the public, which will increase innovation in the United States.

So, what does this mean for businesses going forward?

1. The USPTO will consider more recent prior art when examining applications.
2. Public disclosures by businesses must be documented. All businesses should have procedures in place to document inventions as they are made. However, it will be more important to document when and to whom disclosures are made as part of these procedures. Having this information may determine the outcome of prosecution of a patent application or many years down the line in a patent infringement proceeding.
3. Confidentiality remains critical. Businesses should have a confidentiality agreement on file to use during private disclosures.
4. Consider provisional patent applications more often. The USPTO does not examine provisional patent applications, and oftentimes they are much less detailed than nonprovisional patent applications. A provisional patent application secures a filing date and is useful when an invention is in its early stages. A related nonprovisional patent application must be filed within one year of the provisional patent application to benefit from the provisional filing date.  
5. Do not rush to disclose inventions if you intend to file a patent application and have not yet done so. While disclosure may have benefits in some situations, the law is just too new in this area right now to know all of the negatives associated with disclosure.

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 I saw an interesting article on the LexBlog Network regarding how to deal with partner disputes. The post written by Texas restaurant lawyer, Matthew Sanderson, dealt specifically with restaurants, but the information contained in the post is applicable to any business. Sanderson recommends the following when a dispute occurs:

1. Avoid the conflict by identifying motivators and doing your homework;
2. Open the lines of communication;
3. Stand up for yourself and your rights (but don't lose your cool).

I often compare partnerships to a marriage. In any marriage good communication is essential to maintaining a happy household. Where I've seen partnership disputes fester and cause problems is when the partners fail to communicate with one another. So I think Sanderson's bullet points are right on target.

Further, a helpful piece of advice for avoiding partnership disputes is to set clear expectations of what each partner is bringing to the table. Even though it isn't a part of your typical operating or shareholder agreement, you may what a letter of understanding defining the roles of each partner. Partnerships work best when the partners have complementary strengths. For example, a strong sales person combined with strong operations or details person may have a strong partnership together where two partners with the same skill set lack the balance needed to run the overall business.

Partnerships are not easy. Be sure to have a partnership agreement in place that details what happens if a dispute occurs or the partnership ends due to death, disability or other reasons. Sanderson's last point on not losing your cool is especially important. Make sure you think things through before you react and hopefully you'll be able to avoid costly mistakes if a partnership dispute occurs.

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 Entrepreneur Magazine has a good article on Five Overlooked Legal Mistakes Entrepreneurs Make. Those mistakes include:

1. Making handshake deals with clients and vendors;
2. Choosing the wrong business structure;
3. Bring on partners without a detailed agreement;
4. Establishing a 50/50 partnership;
5. Filing a trademark without doing enough homework.

In my practice I've seen the mistakes outlined above cause significant problems for entrepreneurs. Getting agreements in writing is one of the easiest things you can do to avoid legal mistakes, whether it's with clients and vendors or partners. 

I find it refreshing that the lawyer quoted in the business structure section prefers setting up corporations most of the time for her clients. LLCs are formed roughly at a 2 to 1 rate compared to corporations in Iowa and I'm sure nationally that trend follows as well. In many cases, a corporation may be preferable to the LLC. It all depends on the circumstances. All too often people are quick to form a business entity without much thought or investigation. My experience, however, it's best to speak with a business lawyer and accountant prior to forming your business structure to see what best meets your needs.

The trademark issue is also a great one to point out. My experience is that most entrepreneurs fail to check whether their trademark is available with the U.S. Trademark office. This often results in problems if the business name or trademark infringes on another mark. If an entrepreneur has invested significant dollars in marketing and branding, that mistake can be very costly. So it is helpful advice to speak with a business attorney and/or trademark attorney to determine the availability of obtaining a trademark for your business name. 

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The Des Moines Register reported that investor group Plains Angels has invested $750,000 over the last eight months. This is great news for Iowa startup companies. Venture capital in Iowa has lagged and groups like Plains Angels are definitely trying to change that.

There is a $300 application fee to present before the Plains Angels' group. In some blog posts and other social media outlets, I've seen the fee criticized by some who expressed concern that it was just a fee collection group. I considered that assertion somewhat naive on the part of some seeking funding, but the recent news should alleviate some initial fears that the group is actually making investments in companies rather than just collecting fees. The significant investment made over the last eight months in three Iowa companies is very promising for the Iowa startup scene.

If you're interested in learning more about the process for Plains Angels or becoming an investor, be sure to visit the Plains Angels Website.

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