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

Lately we've heard from a number of business owners that are interested in franchising their businesses. It's always exciting to talk with entrepreneurs who are enthusiastic about their business models. Franchising is an attractive option for many.

But there are lots of things to consider before you move down the path of franchising your business. First, you'll need to understand the legal requirements to franchising a business. You'll need a federal registered trademark and also comply with the Federal Trade Commission (FTC) disclosure requirements. As a part of your disclosure requirements, you'll need to prepare a franchise disclosure document (FDD) which contains 23 specific iftems such as the background about the franchise business and its principals,franchise and other fees, whether you've been involved in litigation, estimated costs, an explanation for how territories are determined, the process for purchasing goods and services by franchisees and several other aspects. THe FDD also contains the franchise ageement and any other contracts the franchisee must sign.

Another thing to keep in mind is that you'll need audited financial statements, and in certain states, you'll need to register your franchise offering and renew it each year with the appropriate state agency. All of this takes time and costs a substantial sum of money.

There are many business considerations as well. Some questions a potential franchisor should ask themselves include, but are not limited to, the following:

1. Are you making a good living in your business?
2. Have you operated multiple locations?
3. Do you have a proven system of operation?
4. Are the profit margins large enough for the franchisee to make a good living, support employees and pay you a royalty?
5. Do you have the time to devote to a franchise operation?
6. Do you have the skill set to promote a franchise operation?
7. )Do you have start-up and operating capital?
8. Will franchisees be able to get financing from afforable sources?
9. Does your business have a unique selling proposition?
10. )Does success of the business depend on skills people have or can quickly acquire?
11. Is the market stable enough to provide for growth over several years?
12. Are you able to support franchisees once you get them in business and do you have something to offer them beyond getting them in business?
13. Do you have a recognized brand name?

Franchising is not something to take lightly. It's a major investment and dealing with franchisees, under the best of circumstances, can often be demanding. Do your homework, plan and conduct an honest assessment of your business before you take the plunge.

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This past week I attended the ABA Franchise Forum in Baltimore for the fifth year in a row.  One of the traditions of the Forum is the annual presentation on Franchise and Distribution Law Developments. This year, Lee Plave and Stuart Hershman delivered an excellent presentation during which Iowa took center stage with the KFC decision discussed in my last blog post. Stu Hershman described it as perhaps the most significant franchise case of the year.

The presenters raised the question about whether franchisors should voluntarily disclose royalty revenues to the Iowa Department of Revenue in order to avoid penalties and interest. It will also be interesting to see how aggressive Iowa (and other states) will be in pursuing out-of-state franchisors for income and other tax purposes in light of the U. S. Supreme Court's refusal to hear an appeal of the Iowa decision. No matter what the KFC decision is a case franchisors should not ignore.

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On December 30, 2010, the Iowa Supreme Court ruled that a foreign corporation could be taxed on revenues received from the state of Iowa even though the company had no physical presence within the state of Iowa but rather received royalty revenues resulting from intangible property (i.e. the use of trademarks and licenses to franchisees) within the state.

KFC Corporation does not own stores within the state of Iowa. Alll stores are owned by independent franchisees. Further, the corporation has no employees within the state. But that didn't matter to the state as a "physical presence" is not required and the state may impose a tax when:

Such part of the income of a non-resident is fairly attributable either to property located in the state or to events or transactions which, occuring there, are within the protection of the state and entitled to the numerous other benefits which it confers.

The U.S. Supreme Court recently refused to hear an appeal to overturn the decision.

An interesting post on the decision from the BlueMauMau blog is available here.

The full Iowa Supreme Court opinion can be read here.

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One of the things I love the most is providing proactive educational workshops to companies and other organizations.  Due to the ever-growing interest in the topic, I am pleased to announce that I am now offering a new legal training workshop for businesses, large and small, regarding social media. A custom workshop will be designed for your business to cover the following topics:

• Overview of Social Media, New Developments and the Future
• The Use of Social Media in the recruiting and hiring process
• Balancing Employee privacy v. Employer's Business Interests
• The risks and benefits of Employees using Social Media in the workplace
• What every supervisor needs to know about the use of social media
• How (or whether) to discipline employees for Social Media use
• Social Media and its impact on Litigation
• Social Media Train Wrecks
• Summary of Social Media Case Law Developments 
• Drafting the Social Media policy 

To tailor the presentation specifically for your organization, we will send you a questionnaire in advance regarding your organization's and employees' use of social media and your existing policies and procedures.  Every company is different and the presentation will be designed to address your organization's specific issues, size, level of understanding and industry. Like other forms of employment based training, not only can social media legal training help you in the event you get pulled into litigation, but even more importantly, it can help prevent costly litigation and the loss of employee productivity.

Social media presents unprecedented opportunities and challenges for your business. It is essential that your executives, supervisors and employees stay informed about this ever-changing and important topic. For more information on social media legal training workshops and fees, please feel free to contact me at rush.nigut@brickgentrylaw.com.

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Franchisees generally want an exclusive territory that is protected from encroachment by other franchisees or the franchisor's company owned stores. Unfortunately franchisees are often under the mistaken belief they have an "exclusive territory" when they really don't.

You must consider whether the franchisor has reserved rights that could cause encroachment or competition from the franchisor, other franchisees or even other companies the franchisor may acquire in the future.

Further, franchisors may have a Web site where it conducts online retailing but franchisees are not permitted to conduct online retailing themselves.  Do you really have an exclusive territory if the franchisor conducts sales online? If the franchisor's online sales are significant, it could potentially divert customers away from the franchisee.

So don't gloss over the territory provisions in the FDD or franchise agreement. If you are told that you have an exclusive territory when meeting with the franchisor's representatives you better make sure that is actually the case.

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