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

Do you know the difference between sole proprietorships, partnerships, corporations and limited liability companies? Do you know whether to set up an S corporation or is a C corporation better for you? Are limited liability companies really all that and a bag of chips?

Be sure to join me for an information-packed webinar through MyEntre.Net on Thursday, February 2, 2012 at 12:00 p.m. CT as we discuss the common business structures and how these various legal structures vary in complexities. Plus, we'll talk about the common misconceptions that abound in choosing a legal structure for your business.

If you're thinking about forming a business entity soon, you won't want to miss this seminar!

Register for the seminar today.

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Franchisee lawyer Richard Soloman suggests there may be watershed changes in franchising over the next 15-20 years in a post on BlueMauMau. It's an interesting post from a lawyer who has seen many franchisees lose their life savings in franchise operations gone awry.

Some prospective franchisees reading Richard's post may be surprised. Are the problems in franchising that serious? After all, isn't it safer to own a franchise than an independent business? The answer is an emphatic NO!!!!! The fact is that franchise businesses fail at about the same rate as independent businesses. One could argue it's even tougher to make a franchise work financially when you consider that franchisees are required to pay royalties, advertising and other fees even when the franchisee's business is not profitable. The notion that franchises offer a proven system that will work for franchisees really isn't the case in many circumstances. Many franchises are neither "proven" or a "system".

I agree that franchising could use some important changes over the next 15-20 years. A few things could make a big impact in my opinion:

1. Uniform Franchise Laws. Franchising laws vary widely from state to state. Although it wouldn't be easy to get all the stakeholders to agree, it would be helpful for franchisors and franchisees to have uniform franchise relationship laws so that everyone is operating under more predictable standards. I don't think most franchise lawyers see this on the immediate horizon but it should happen in my view.
2. Unprofitable Franchisees Should Be Permitted to Terminate. Should an unprofitable franchisee be forced to stay in business or pay lost royalties for the duration of the franchise agreement? I know that risk is inherent in business and franchisees are contractually bound. Not every franchisee will be successful and sometimes failures occur through no fault of the franchisor. But most often there is blame on both sides and franchisors should acknowledge their involvement (or lack of involvement) in unprofitable franchise locations. But my idea isn't that franchisees get off scot-free. Instead, how about lawsuit immunity for franchisors that give franchisees the right to terminate unprofitable locations? It might just lead to a better team approach.
3. Franchisors must actually be obligated to do something under the Franchise Agreement. I've read franchise agreements where the franchisor is essentially not obligated to do anything for the franchisee. In one recent franchise agreement I reviewed, everything the franchisor agreed to do for the franchisee was "in their discretion".  Why should one party be obligated to do something when the other is not? Just getting the franchisee in business shouldn't be enough for a franchisor.

Those are just a few things in my view that could level the playing field and make franchise opportunities better and safer investments for franchisees. Now I want to make it clear that I don't view every franchisor as evil or bad. But many franchise-franchisee relationships could definitely benefit from a more even playing field. I also don't see any these ideas occurring any time soon and I'm sure there are many franchise lawyers who think these ideas are bad anyway. Of course as George S. Patton said, "If everyone is thinking alike, then somebody isn't thinking." 

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Last night I attended the Greater Des Moines Partnership's Annual Dinner. It was an interesting evening and I enjoyed listening to the guest speaker Christiane Amanpour discuss her experiences as a global journalist. She is obviously incredibly passionate about her work and encouraged everyone in the audience to "DO GOOD" with their work and to help the community around them. 

The Partnership also announced last night that it is continuing its support of the "Hiring our Heroes" program designed to get our unemployed Iowa military veterans back to work.  A video presented before dinner stressed the sacrifice made by so few for so many of us and the tremendous qualities that military veterans demonstrate in workplaces throughout Iowa.

Yesterday, I wrote about Above the Line America a new group formed for business people who have a "GIVE FIRST" attitude. So all of the events and conversations got me thinking, "How can I "DO GOOD" and "GIVE FIRST"?

That's why I have decided throughout the rest of 2012, I will donate my time for any Iowa military veteran who wishes to set up a basic corporation or LLC for a new small business. It's only a small gesture but it's one way that I can say thanks to our veterans who have sacrificed so much for us. So if you are a military veteran in Iowa  who is starting a small business, feel free to contact me regarding this offer.

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A new organization called Above the Line America is hosting a Business Growth Summit in Ankeny, Iowa on January 31, 2012 from 8:30 a.m. to 5:00 p.m. The Summit is located at the FFA Enrichment Center, 1055 SW Prairie Trail Parkway in Ankeny.

The day should be a great one. Business owners and professionals will get an opportunity to come away with an ActionPlan for their business plus listen to some great speakers including Tony Brigmon (the Original Ambassador of Fun for Southwest Airlines, Geoff Wood of Silicon Prairie News, Major Sean Quinlan (a Bronze Star recipient), Jordan Lampe of Dwolla and Angela Maiers of Angela Maiers Education Services. But best of all there is the opportunity to network with many other business-minded people like you.

One of the advisory board members for Above the Line America is my friend Andrew Clark of createWOWmarketing. Andrew and three others started the group to create a network of business-minded individuals with a "give first" attitude. If you have any questions regarding the organization or the event be sure to contact Andrew.

You can register for the event here.

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The first ever Iowa Startup Fair is taking place on Tuesday, January 31, 2012 from 3 to 6 pm. During the fair, new businesses will set up informational tables to showcase thier projects for an audience of business, investment, civic and other community members.

In Des Moines, the Startup Fair locations will be at the Midland, Bank of America and Liberty Buildings. In Cedar Rapids/Iowa City, Vault Co-Working will host. A location in Pella has not yet been determined and other regions in Iowa will be added soon according to the site.

I've decided to participate in Des Moines with my new startup, NotifyWorks. Notifyworks is a web-based automated email system that enables lawyers and other professionals to proactively notify their clients of dates and deadlines.

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Iowa entrepreneurs have an opportunity to connect with potential investors at the i2Iowa Investors and Innovators Forum on April 12, 2012 at Veterans Memorial Auditorium. Business owners and entrepreneurs can pitch their businesses to investors from four tracks which include:

1. Life and Bio Sciences
2. Information Technology
3. Advanced Manufacturing
4. General Business

Companies can apply online through February 7, 2012. The goals of the program are to 1) fund companies and 2) showcase the amazing investment opportunities in Iowa. The program is presented by the Technology Association of Iowa and sponsored by the department of Iowa Economic Development.

Looks like another great opportunity to continue the tremendous momemtum Iowa is experiencing in the startup business community. Check it out!

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I saw an interesting post from franchise attorney Michael Webster on the BlueMauMau site on Negotiating Your Franchisee Rights. Some of his helpful nuggets:

1. Review the FDD to see if they are using franchise brokers - you may be able to knock something off the franchise fee by asking for the broker's rebate.
2. Budget for professional advice. Hire an experienced franchise attorney to negotiate an addendum or side agreement.
3. Get rid of the personal guaranty.
4. Get rid of the right of first refusal - it drives down value when selling.
5. Avoid franchises that limit your use of social media for local marketing.

Read the full article from Michael for more insight. Is it likely you will you get everything on Michael's "wish list"? Probably not. But it is worth asking. Don't be fooled into thinking that franchisors can't and won't negotiate franchise agreements.

The advice on the use of social media is often overlooked by prospective franchisees. In my opinion, a franchisor that won't allow a franchisee to market using social media is stuck in the dark ages. It just doesn't make sense in today's business environment.

See also my blog post on 11 Things Every Fanchisee Should Know. I am an absolute stickler on the trademark indemnification provision. If a franchisor won't indemnify you for the use of THEIR trademark, what else won't they do for you?

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I was researching some issues for an LLC operating agreement and ran across an excellent post from the Wisconsin Business Law Blog on the fact that capital calls are often overlooked by LLC investors. Attorney Todd Goodwin provided the following example,

[i]f a "capital call" provision exists and is exercised by the majority members or by the managing member and one of the members cannot afford to put in the required capital, such member could face expulsion from the LLC, dilution of their ownership percentage in the LLC, super-dilution of their ownership percentage to the point where their percentage is effectively worthless, or other negative consequences. (There can be other consequences, but these are some of the typical ones seen in these types of agreements).

I have seen this happen several times with limited liability companies. It happened frequently for investors during the latest economic downturn, especially with real estate investors who could not meet their capital calls. Many of those real estate investors faced expulsion as a result. As Todd points out, the capital calls are neither bad or disadvantageous, but are often important for the operation of the LLC. As an investor it is important to review and understand fully the terms of the capital call provisions BEFORE you sign the operating agreement.

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This year I've reviewed so many franchise disclosure documents for prospective franchisees that I've lost count. No matter the industry, it seems as though I am always discussing the same things with franchisees, whether they are interested in fitness, restaurants, business services or tech. So here are 11 things I'd like every franchisee to know when they are considering a franchise opportunity:

1. A franchise must have a strong brand or a great system (preferably both). Many prospective franchisees consider brands no one knows about. If so, that brand better have a product or system that knocks your socks off because you're going to need to promote it just like you started up your own new independent business. Buying a well-known brand is usally better because the franchise name recognition is often so critical to success. Without a strong brand name or a great system, what are you buying?
2. Be willing to walk away from the deal. In my experience, franchisees who are willing to walk away, get the best deals. They are the ones who get concessions in fees, territorial protections and other terms in the franchise agreement. It's like buying a new car, if you're willing to walk away, the sales person will usually stop you with a better offer.
3. If it isn't in writing, the franchisor isn't going to do it. Many franchisees tell me that a franchisor told them 'this' or the franchisor told them 'that'. If 'this' or 'that' isn't in the franchise agreement, you can be rest assured the franchisor will not live up to their end of the bargain. You can take that to the bank. 
4. Trademark indemnification is necessary. Are you really going to invest your life savings in an opportunity when the franchisor won't even stand by their brand and trademark by defending you if someone sues you for using the FRANCHISOR's trademark? In my opinion franchisors should be legally required to defend franchisees for the use of the franchisor's trademark. After all, the marks are the heart of the franchise. Most franchisors I've dealt with will make this concession in their franchise agreement but it still amazes me when it's not addressed up front in a franchise agreement.
5. Determine if franchising is right for you up front. Some people are not rule followers. These people will not make good franchisees. If you want to chart your own course with a business, don't become a franchisee.
6. Interview as many current and former franchisees as possible. If you aren't willing to take the time to call current and former franchisees, you probably get what you deserve if the franchise opportunity goes wrong.
7. Avoid personal guarantees for your spouse. Most franchisors will require a personal guarantee from you. However, there is no reason to throw all your eggs in one basket by having your spouse sign a personal guarantee too.
8. Bargain with new franchisors. I am leery of people investing their life savings in a new franchisor but I realize it is sometimes a great opportunity to get on the ground floor of a franchise. But remember that most new franchisors NEED to sell franchisees. This means you may have greater bargaining power to get a better deal.
9. Franchise agreements are negotiable. Franchise agreements are negotiable even if the franchisor says they're not. Do not be afraid to negotiate. A franchisor that gets upset with you because you try to negotiate is not the right franchisor for you. It's not personal, it's just business.
10. Mutliple Unit Franchising has the most risk but offers the most reward. In my view, owning multiple units allows you to harness the true power of franchising. The franchisees I see who are the most successful are all multi-unit owners. However, this usually requires a substantial investment and should not be considered unless you have sufficient capital. But owning one franchise unit of system is unlikely to ever make you wealthy and often you are just buying yourself a job.
11. Franchise businesses fail at roughly the same rate as other businesses. Over the past few years I've seen many franchisees you could not make it for one reason or another. Don't fall for the trap that franchise businesses are less likely to fail. It couldn't be further from the truth.

Don't trust your franchise selection to luck. Do your homework and carefully consider all your options before making a substantial investment in a franchise.

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