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.

 

 

Insight on Business - The News Hour with Michael Libbie

You can catch me tonight on the Insight on Business - The News Hour with Michael Libbie this evening at 5 pm on AM 1350-KRNT.

Michael and I will be talking franchise law and more.

It's a great program you should check out. The show runs Monday-Friday each week at 5 PM.

Franchise Negotiation Tip: Be Willing to Walk Away

Prospective franchisees are often under the mistaken belief that franchise agreements are not negotiable. That's often true even after a franchisor says initially that it will not negotiate a franchise agreement. 

So what's one key in obtaining concessions in your franchise agreement?

Be willing to walk away.

It's true of any negotiation. If you are willing to walk away empty handed, you are often much more likely to get a better deal. You are probably in the strongest negotiating position when you don't care whether you become a franchisee or not. However, it is rare that a prospective franchisee takes this position. Usually the the prospective franchisee wants the deal and the franchisor knows it. Without the sense that you are willing to walk away, a franchisor has little incentive to concede on issues in the franchise agreement.

Franchise agreements are generally far too one-sided. Some concessions are generally in order. Don't make the mistake of going blindly into franchise ownership. Get legal representation from an experienced franchise lawyer and understand the provisions of the agreement. And if the franchisor isn't willing to work with you on language in the agreement, perhaps it isn't the right franchisor for you. Demonstrating that you're willing to walk away from the deal can be a very powerful negotiation technique under the right circumstances. Of course, you must be willing to do just that with an understanding that maybe it just wasn't the right deal. In my experience it's the rare person that can do this. But perhaps it helps illustrate why most businesses (even franchise businesses) fail.

 

Proven Franchise Business System Just a Myth?

 If you're a prospective franchise I highly recommend a series of articles written by Robert Purvin, Chairman and CEO of the American Association of Franchisees and Dealers, on franchising myths. One of his best articles touches on the myth that Franchising Provides a "Proven Franchise Business System".

I hear this one all the time. For some reason prospective franchisees automatically assume that because a business has franchised it has a system in place that will lead to profitability. Sadly, this just isn't always the case.

Franchise businesses fail at roughly the same rate as independent businesses. If you are considering a franchise business, be sure to do your homework. Visit franchise locations, talk to as many franchisees as possible and carefully consider whether purchasing a franchise business (which usually includes higher initial fees and costs) is better than starting your own independent business. Often, you will find with many franchise businesses that the system is far from "proven".