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

Are you considering a franchise business?  Read this blog post on evaluating the strength of your franchisor before signing on from the First Prize Franchise blog.

I posted on this a couple of years ago but  I consistently see people who invest their life savings tinto franchise operations.  Some of these people achieve great results but many (perhaps even a majority) do not. What separates the good from the bad? 

One critical aspect to consider in my view is the brand itself.  Is the brand recognizable?  If not, the franchise better have a fantastic system, unique concept or protected intellectual property.  Otherwise, I think you need to question up front whether the franchise is right for you.

There is no also validity to the claim that franchise operations are less likely to fail than non-franchise operations. The truth is that franchisees fail at a rate that is similar to non-franchise businesses. In fact, the International Franchising Association has discouraged all franchisors from making such claims.  So careful due diligence is important when considering a franchise opportunity. One of the best things you can do is talk to as many existing (and former) franchisees as possible. Also, consider several key disclosure issues including:

1. Franchisor's litigation history;
2. Amount of the initial investment;
3. Vendor rebates and products you must buy from the franchisor;
4. Earnings claims made by the franchisor;
5. Franchisor's financial statements;
6. Trends concerning the number of outlets.  It is important to closely review the information regarding outlets. Carefully study the number of transfers and not just the number of closures.  A high number of transfers may be an indication that franchisees in the system are struggling, but bad stores have not been shut down. 

And finally, be willing to walk away. This is the paradox of successful negotiation. Those that are willing to walk away usually find they get more in negotiation, especially in today's economy. Many franchisors are willing to make a deal these days. Don't get in a hurry in your negotiations. You may be able to secure important concessions if you are patient.

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Growing Des Moines businesses may want to consider a six month program offered by the Small Business Administration called the Emerging 200 (e200) Initiative.  Locally the course is taught by Monica Dolezal of Bizstarts.  The program begins in April.

The goal of e200 is to identify 200 inner-city businesses across the country that show a high potential for growth and to provide them the network, resources and motivation required to build a sustainable business within a designated inner-city geographic location.

The cornerstone of the e200 initiative is an in-depth educational program running approximately 80-100 hours, to be held two half-days per month from April through October, 2010. It will focus on topics such as organization management, finance, growth strategies and management, market development, and strategic planning.  Small business executives in the e200 Initiative participate in an intensive and comprehensive program, draw from each other's experiences and expertise, develop connections with local capital providers, and complete a growth plan by the end of the program.

Participation in e200 is free to qualifying businesses. Criteria for participation includes having been in business for a minimum of three years, $400,000 or more in gross annual revenues, and a business location within the City of Des Moines. Participation will be limited to only 15 businesses in Des Moines and 200 businesses nationwide.

For more information contact Monica Dolezal of Bizstarts at 515-229-2345 or the local Des Moines SBA office at 515-284-4522.

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A common thing I see from franchisees is that they include only the name of their franchise in an agreement as opposed to including their corporate or limited liability company name. Most of the time the names are different. For example, if my franchise is "Tops Franchise" but my corporate name is "Rush Nigut Enterprises, Inc.", I need to make sure the corporate name is included in the contract. 

I had this exact thing happen to a franchisee client. He failed to include the name of his corporation in a contract and used only the name of his franchise. The court ruled that he was personally liable for the debt because he had not disclosed to the other side that he was signing in a corporate capacity.

So be careful to always include your corporate or LLC name and sign with your title, (i.e. President, Vice-President, member, etc.).

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A bill in the Iowa Senate could require all businesses to provide paid sick leave to their employees.  My gut tells me many small businesses cannot afford to provide paid sick leave.

What do you think? 

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This is a part of an on-going series of posts which will form the Legal Guide for Starting a Business in Iowa.

You are considering forming an Iowa small business. What type of business structure should you choose? In Iowa, your choices generally are a sole proprietorship, a partnership, S corporation, C corporation, or a limited liability company. There are others but these are the main entities to research.

Some of the factors to consider in choosing a business structure are:

1) Personal liability protection;
2) How profits are taxed;
3) Ability to take advantage of fringe benefits;
4) Ease in raising capital.

A sole proprietorship is the easiest to set up (you generally do not need to take legal action) but you have unlimited personal liability. In today's sue happy society it is probably a good idea to consider a form of business that provides you with personal liability protection like a corporation or LLC.

Similarly, a partnership is also easy to set up and involves two or more people. A partnership requires no formal documentation but a partnership agreement is preferred. Like sole proprietorships, you and your partners have unlimited liability. With the ease of setting up and operating a limited liability company, a partnership is usually not recommended given today's litigious society. 

Traditionally, most small business owners selected the S corporation as their form of business. The S corporation is often a good choice because it provides you the limited liability you need but you avoid double taxation because all business profits are taxed to you as an individual.

The limited liability company has exploded in popularity over the past decade and also provides limited liability and avoidance of double taxation. An LLC may offer flexibility not available with corporations when it comes to ongoing requirements, its ownership and how the owners are paid.

The C corporation has traditionally been used for larger businesses but accountants may recommend this entity because the owners can take advantage of certain fringe benefits. Also if you need outside capital, a C corporation may make it easier to attract investors such as venture capitalists.

So which business structure should you choose? Before choosing a business structure it is wise to talk with an accountant. The accountant can review your financial situation with you and advise you on the best strategy for your business. In my view the choice of a business structure usually boils down to tax treatment. So talk to your accountant first and then go to the business lawyer to set up the business entity.

Our next posts in the Legal Guide to Starting a Business in Iowa series will examine the S corporation, limited liability companies and C corporations in more detail.

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This February is National Start a Business Month. To celebrate I am offering to form any Iowa incorporation or LLC for half the price during the month of February 2010.  It's my small way to encourage business start-ups and help out start up entrepreneurs.

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A couple of years ago I set out to write a Legal Guide to Starting a Business in Iowa. Unfortunately trying to work, write a blog, coach baseball and write the guidebook didn't quite work for me. I started the guidebook but never came close to finishing it.

So this year I have decided to blog the guidebook. At the end of the project, I'll have my book and hopefully Iowa entrepreneurs will have something that is helpful and informative.  The project may take several months so most of the information on the blog over this time will be very general in nature rather than dealing with current events. I'll still blog on current events as appropriate.

Thanks for your continued support and have a happy New Year!

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A couple of years ago I touched on how wage and hour lawsuits were on the rise. Since then Iowa's own Casey's General Stores got tagged for $11.7 million in a settlement.  But not even I could have predicted the potential $1,000,000,000 liability that AT&T allegedly faces for failure to pay overtime. Yep, that's a BILLION dollar claim!

Naturally that kind of pie in the sky number might leave one to think, "It's never going to happen to me, my business is much smaller and I won't be a target." But when you look at the fact that experts believe approximately 70 percent of businesses are out of compliance with wage and hour laws, you shouldn't be quick to shrug off the prospects of a process server knocking on your door. All it takes is one disgruntled employee to contact the Iowa Workforce Development or the Department of Labor and you could find yourself in the middle of a wage and hour dispute.

So what are some helpful tips to avoid wage and hour lawsuits? (The outline below is from an earlier post.  The comments from some prominent employment attorneys are especially good).

• Conduct a Wage and Hour Review.  Your first step should be to get with an employment law attorney or other wage and hour/human resources specialist who can review your pay practices to determine whether you are in compliance with the law.  The cost spent for a review and developing a compliance program could save you tens of thousands of dollars in the long run or perhaps even millions if you run a large company. 
• Train Managers.  Making sure managers understand the rules is paramount.  Managers can avoid costly mistakes and spot problems before they become too costly.
• Think Exempt-Non Exempt, Not Just Salary - Hourly.  Too many employers pay employees a salary and then believe that relieves them from any obligation to pay overtime.  Employees need to make sure those employees are properly classified as exempt (someone who is typically not paid overtime) or non-exempt (someone that is generally entitled to overtime).
• Take Complaints on Wage Issues Seriously.  You want to treat wage and hour complaints just as seriously as employment issues including harassment or discrimination.  In fact, these wage and hour lawsuits could be more costly to your business.
• Do Not Retaliate.  Never, never, never retaliate against someone that makes a complaint for wage and hour issues.
• Develop strong policies on pay practices and employee hours.  Make sure employees work those hours assigned and do not work off-the-clock.  Above all, properly document the number of hours worked because just like in baseball where a tie goes to the runner - if the employer has not documented the hours worked by the employee - the benefit of the doubt will go to the employee. 

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An article in Barron's supports, in a big way, the importance of keeping good business records. The article details how the IRS disputed a $75,000 repayment of a loan for a business owner named Henry resulting instead in a $68,000 dividend, on which Henry owed tax. 

Joseph Gelband, a tax attorney from Larchmont, New York, wrote the article. He provides some wise counsel for business owners:

[Henry's] story points to the importance-especially for a closely held corporation-of observing formal business practices, if for no other reason than to create a record.  Minutes should be kept, and updated at least annually. Executive salaries, bonuses, and loan transactions should be reflected in those minutes, which should be reviewed by the company's accountant when statements are prepared.  The existence of that kind of paper trail would have left Henry in a much stronger position.

Now is a great time to document those transactions before the end of the year. 

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I had the pleasure of sitting down for an interview with Michael Libbie yesterday. We talked blogging, discrimination cases, franchising and other issues.

If you didn't catch it live you can watch the podcast here. (The interview begins at about the 30 minute mark).

If you haven't heard about Des Moines Local Live, you should check it out. It's an Internet radio station with 50 local radio hosts talking everything from business to sports.  A real testament to Des Moines' Internet-blogging presence.

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Need capital for your business? Looking for an investor? If so, you should take the opportunity to attend a seminar from the Business Innovation Zone of Central Iowa (BIZ) on how to get your business into shape and attract an investor's eye.

Adam Claypool of DeWaay Investment Banking is the speaker. I have worked with Adam on several occasions so I know this will be a worthwhile opportunity to listen to one of central Iowa's more prominent investment bankers. The presentation is this Wednesday, October 21st at the Des Moines Partnership offices, 700 Locust Street, Suite 100, Des Moines, Iowa. It begins at 11:30 a.m.

Afterwards you can listen to me on the radio this Wednesday at 1:00 p.m. with Mike Libbie offering insights on business on Des Moines Local Live.

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Megan Erickson of the Dickinson Law Firm has started Erickson's Blog on Social Networking and the Law.  Now that's a blog that will have a never ending flow of posts.  She already has an interesting array of posts including one where a business owner got slapped with a $2 million libel lawsuit for Facebook and Twitter posts.

This is one blog I'll be sure to follow.

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Okay, you have decided you can do it on your own. You don't need a lawyer to review your agreement (at least until the proverbial you know what hits the fan).  But let me give you some MasterCard commercial-like "priceless" advice:

READ YOUR AGREEMENTS. 

I am honestly not trying to be a smart aleck when I say this. I cannot tell you how many times I have seen really smart business people fail to follow this simple plea.  Just reading and actually understanding your agreements will help you avoid a great deal of trouble - with or without a lawyer.

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You've probably seen them in your contracts. Miscellaneous provisions such as choice of law, litigation venue, successors and assigns provisions, no waiver, entire understanding, or supersede clauses.  They tend to always appear at the end of the contract and are almost always an afterthought by the parties. After all, those provisions don't mean anything, right? 

Wrong.

Often when a contract claim proceeds to litigation these miscellaneous provisions are outcome determinative.  Take for example the litigation venue provision.  Let's say you are a small Iowa company and the contract specifies that your case must be heard in the courts of Los Angeles, California.  This means you must be prepared to fight the case in Los Angeles or you may automatically lose your case. The California venue will almost assuredly drive up the costs of litigation over an Iowa venue. First, your Iowa lawyer, unless he or she is licensed in California, will need to get local counsel in California. Chances are the California local counsel will charge a substantially higher hourly rate than here in the Midwest and you will likely need to travel for court hearings and other proceedings.  WIthout the money to fight, you are doomed from the outset regardless of how good your case may be. Plus, without a history with the judges in that state it is often difficult to predict the outcome of issues which could put you at a real disadvantage.

That's just one example. The other miscellaneous provisions in your contracts can come back to bite you in other ways. My recommendation is to carefully consider these provisions and don't treat them as an afterthought. If litigation occurs, you may be very happy you did.

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A recent case reported in the Des Moines Register discusses how a handshake deal on the sale of a home went awry for a man that apparently invested over $100,000 in a home - only to learn the home was not his.

Actually there was a one-line agreement in this instance which read, "I Floyd A. Schake agree to put 1500 E. 9th on contract with Billy Erico Stockbauer on 1 Feb. 1989." Schake argued successfully to the court that the language meant he intended to sell the home on contract in the future but the deal was never made.

While the axiom is to get a contract in writing, it is especially critical in real estate deals where oral contracts are generally not valid. The judge in the case ruled that the language did not set out the terms necessary to convey the property.  It's fairly easy to criticize Stockbauer for not having an agreement that set out all the terms but this type of thing happens much more than anyone would ever imagine.

That's why the old adage holds, "get it in writing."

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How Business Gets Done, Words of Wisdom from Central Iowa Experts has hit the virtual bookshelves at www.lulu.com. I am honored to be a contributing author with several respected peers in our business community. My chapter is on the Partnership Prenuptial where I discuss the importance of drafting a  buy-sell agreement from the beginning of your business relationship.

The costs of litigating a business dispute can easily run in excess of $100,000 per side while a buy-sell agreement usually costs less than a a couple of thousand dollars. Unquestionably most business owners would rather concentrate on running their business than spending time in court.

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Whether you are starting a business from scratch or buying an existing business you should consider setting up a corporation or limited liability company (LLC) before you actually sign any agreements or documents relating to your new venture. To the extent possible, avoid signing any contracts, loan agreements or leases in your personal name. In many cases, however, you may be required to personally guarantee the loan or other debts but it is still recommended that you place those agreements in the company name. It is often surprising how the start-up documents may impact litigation issues down the road. If those agreements are in the business name it may help you avoid personal liability on unknown issues in the future. One of the most important reasons for starting a corporation or LLC is to protect your personal assets from the risks of the business. It is smart to start right from the very beginning.

A post from Ohio business lawyer Terri Rasmussen describes how one person went a little too far in trying to avoid personal liability. But the underlying advice in the blog post cannot be minimized. It is critical to sign documents in your corporate capacity (i.e. "President" or "Vice-President") and if you are signing on behalf of an LLC you should sign as "Member". Using catchy marketing titles such as "Big Cheese" or "Chief of Results" has no place when you are signing documents that could bind your business and subject you to personal liability. 

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Looking for money for your business? Check out the entrepreneurial resource guide from Biz. The guide explores and explains grants, loans and assistance programs.

I am excited to speak at the Biz on How To Choose the Right Business Structure for Your Business. The presentation is June 17th at 11:30 a.m. The admission fee is $10.00 and lunch is provided. 

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From time to time I enjoy featuring a business law blog worth reading. The San Diego Small Business Law Blog from Joseph Dang is definitely one to check out. Although the blog is centered on California law, Joseph has a number of general posts that are helpful to any small business owner.

In particular, I encourage you to read his posts on business formation and incorporation. Real good stuff!

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A few weeks ago I attended a conference relating to venture capital in Iowa. During the talk several of the panelists commented that they would not sign a non-disclosure agreement prohibiting them from discussing a potential business idea they learned about from someone seeking capital. The venture capitalists did not want potential liability for ideas that they might hear several times in a week. Almost every single panelist indicated that sliding a non-disclosure agreement over the table at the beginning of the meeting was a deal killer.

That discussion led into a great discussion involving non-compete agreements and employee non-solicitation agreements. The participants had mixed feelings about non-compete agreements. It is often tough for entrepreneurial types to admit that restricting another person from competition is a good idea. However, all were committed in the importance of employee non-solicitation agreements. An employee non-solicitation agreement prevents one of your employees from hiring one or more of your employees for a set time period, generally about 1 year.

In the end the panelists believed that the human capital was critical to the success of the business, perhaps even more so than the clients themselves. An interesting take indeed. 

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 I am excited that the Wall Street Journal featured Rush on Business as one of the blogs that provide insight for would-be franchisees.  One of my passions for a long time on the blog is providing information to franchisees on pre-investment due diligence.  Recently I ran across a potential franchisee that was told by a franchisor that he should not seek legal counsel. The franchisor told the prospective franchisee that a lawyer would only try to talk them out of the deal.

The purpose of a franchise agreement and disclosure document review is not for the lawyer to talk the client out of their franchise business opportunity. An appropriate review will help point out the legal and business risks and possible areas of negotiation. (Yes, many franchise agreements are negotiable). After the review, the client must still make their own decision about whether to proceed forward. I have been told by more than one client that a review opened their eyes to help them better understand the franchise opportunity. Some moved forward while others backed away from the deal.

There are some classic warning signs of franchisors that I have written about in the past. You could probably guess #1. There are a significant number of excellent franchisors out there. Don't waste your time on those that don't believe you should seek counsel when you are potentially investing your life savings.  You owe it to yourself to do the best job possible investigating the franchise and performing the most due diligence possible.  

Some of the other sites in the WSJ article are a great place to start for that due diligence including:

Blue MauMau (www.bluemaumau.com)

Franchise-Chat (www.franchise-chat.com)

The Franchise Pundit (franchisepundit.com)

Unhappy Franchisee (www.unhappyfranchisee.com)

www.wikidfranchise.org

I would also add one of my personal favorites, The Franchise King Blog. The blog's  author, Joel Libava, is pro-franchise but is a big proponent of franchise due diligence.

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I'll be one of the speakers at the Raising Capital seminar sponsored by BIZ this Tuesday, March 24th at 8:00 a.m.  The seminar admission fee is $30.00 and features entrepreneurs, venture capitalists and accountants. The seminar is designed to help the entrepreneur plan successfully for an investment in their business.

For more read here.

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In these tough economic times many individuals have lost their jobs. As a result, many are thinking of opening their own business or buying a franchise to replace the income lost from their former job. Franchise lawyer Charles Internicola has an excellent post on the topic. Charles has also published a new book, An Entrepreneur's Guide to Purchasing a Business, to provide important information for would be business owners.

Over the years I have been fortunate to see successful business owners from all walks of life. But remember, the vast majority of businesses fail. Do not jump hastily into a decision to own your own business. Charles points out some of the major considerations you will need to think about including whether you have sufficient capital, family support and whether you are prepared to "wear the many different hats" required of the new business owner.  

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Partnership agreements (also known as Buy-Sell Agreements) are like prenuptial agreements for people that are in business together.  The formation of any business with multiple owners should include a buy-sell agreement.  Why?  Because reality dictates that it is not a matter of IF your partnership will end, but rather WHEN your partnership will end. Unfortunately the buy-sell is an agreement that is often neglected by business people because they want to save on initial start-up costs or falsely believe there is no need because the partner is a “friend” or “family member”.  As a fellow business lawyer says, “As with prenuptial agreements, people tend to overlook the importance of buy-sell agreements or simply don’t want to deal with the subject; after all, they are in love!”

What are effective buy-sell agreements designed to accomplish?  An effective buy-sell agreement covers how an owner can sell his ownership interest and how that ownership interest is valued.  Further, an effective buy-sell agreement sets forth what happens in the event of an owner’s death, disability, retirement, termination, divorce, bankruptcy or other considerations.  These agreements will also generally require a right of first refusal.  This means if one owner finds an outside buyer for his interest the owner must first offer those same terms to the existing owners.  This protects the owners from suddenly running the business with someone they did not intend to have as a partner.

When should you enter into a buy-sell agreement?  The time to enter into a buy-sell agreement is at the beginning of the business relationship when everyone is excited and getting along well.  Dealing with the buy-sell agreement in the beginning helps to prevent the unenviable position of negotiating under difficult circumstances with former friend, their families and their estates.  It is often difficult to negotiate a deal when something has gone wrong and people are upset.  Without a buy-sell agreement negotiated in the beginning, owners may end up in court and the business may suffer.  The costs of litigating a business dispute can easily run in excess of $100,000 per side while the buy-sell agreement usually costs less than a few thousand dollars. Unquestionably most business owners would rather concentrate on running their business than spending time in court.

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There has been considerable interest in raising venture capital among several entrepreneurs in the Des Moines area recently. For those looking to raise capital you won't want to miss an upcoming event sponsored by BIZ.

Matt Kinley, senior vice president of Pappajohn Capital Resources and Equity Dynamics, will be the BIZ guest and speaker at the Business Insights and Networking Luncheon on February 18, 2009. Matt will discuss raising venture capital from the investor's point of view.

Many entrepreneurs do not understand what is expected from their business in order to raise capital. This is a great opportunity to learn from one of Iowa's most respected and active venture capitalists.

The admission fee is $10.00. The event starts at 11:30 a.m., February 18th at the Des Moines Partnership's offices, 700 Locust Street, Suite 100 in downtown Des Moines.

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One of my favorite franchise related bloggers is Joel Libava who is affectionately known as The Franchise King. He has more franchise related blogs than possibly anyone on earth. He also has written an informative book on the steps needed to effectively research franchise opportunities.

Libava is quoted in a recent Entrepreneur article on How to Research a Franchise.  I recommend reading it.

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The Des Moines Register has an interesting article on the fitness business market in Des Moines. Included in the article is a discussion on the growing number of 24/7 franchises in Des Moines. So, it begs the question, "Is buying a fitness franchise a solid investment in this market?"

I have represented a number of franchisees in the fitness industry. Based upon this experience, I would say the competition is fierce and a prospective franchisee needs to carefully consider whether to purchase a fitness franchise gym given the current market conditions in Des Moines.  Specifically, I would look very carefully at the trends of the franchisee concerning the number of outlets.  You should closely review the information regarding outlets. Carefully study the number of transfers and not just the number of closures.  A high number of transfers may be an indication that franchisees in the system are struggling, but unprofitable gyms have not been shut down.  Of course if there is a significant number of closures in the system that is definitely a bad sign. The reality is that profitability in this market with a fitness franchise gym is often a tough task to achieve.

Be sure to visit with current franchises and franchisees that have left the system. Ask the franchisor whether its records are updated so you can talk to as many franchisees (and former franchisees) as possible.  Consider what will differentiate your facility from other gyms in the area.

I am not saying that profitability cannot be achieved in this industry but I encourage any prospective fitness gym franchisee to conduct thorough research (and maybe think twice) before making the investment.

FYI:  Coming soon I have developed a new niche site related solely to franchise issues called RushonFranchise. It will include programs on how to research and buy a franchise for franchisees and how to develop a franchise program if you are a franchisor. I will interview experts in the industry and will have in-depth materials on franchising. For those of you that are regular readers, this is the ever-evolving Interactive Learning Environment I referenced previously on this blog.

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With the recent economic downturn, layoffs have begun to occur. A potential option for many former corporate employees is franchise ownership. While franchising does offer many advantages it is critical to approach a franchise opportunity just as you should any other business opportunity - with caution.

It is a misnomer that franchises are more likely to succeed than other businesses. In fact, the International Franchising Association has discouraged all franchisors from making such claims. The truth is that franchises fail at a rate that is similar to non-franchised business.  So careful due diligence is important when considering a franchise opportunity. One of the best things you can do is talk to as many existing (and former) franchisees as possible. Also, consider several key disclosure issues including:

1. Franchisor's litigation history;
2. Amount of the initial investment;
3. Vendor rebates and products you must buy from the franchisor;
4. Earnings claims made by the franchisor;
5. Franchisor's financial statements;
6. Trends concerning the number of outlets.  It is important to closely review the information regarding outlets. Carefully study the number of transfers and not just the number of closures.  A high number of transfers may be an indication that franchisees in the system are struggling, but bad stores have not been shut down. 

And finally, be willing to walk away. This is the paradox of successful negotiation. Those that are willing to walk away usually find they get more in negotiation.

For more on franchise due diligence be sure to visit the Federal Trade Commission's Consumer Guide for Buying a Franchise. 

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This blog post is the fourth in a series of blog posts highlighting changes in the 2009 Iowa Limited Liability Company Act. The new law applies to all LLCs filed in Iowa after January 1, 2009. The new LLC law will apply to older LLCs beginning on January 1, 2011 unless otherwise agreed by the members.

The new Iowa LLC law has a significant change relating to management. The current law provides that member voting is based upon capital contributions of the members. Generally, that means voting is based upon the percentages of the members and a member with 51% or more will control how the company is operated.

 However the default provision with the new LLC law is one member - one vote. This means that even a member with a minority percentage may have the ability to have as much management authority as an member that has a majority of the membership units. Accordingly, if a majority owner wants to maintain management control, the written operating agreement will need to specify such arrangement.

This may become even more important after January 1, 2011, when all LLC companies will need to comply with the new law. Some unsuspecting LLC majority owners may be surprised to learn that they may not be in control of their business unless an operating agreement specifies the majority interest controls.

This issue is just one of reasons I recommend that all LLC owners seek legal advice from a business attorney when forming an LLC under the new Iowa LLC act.

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This blog post is third in a series of blog posts highlighting changes in the 2009 Iowa Limited Liability Company Act. The new law applies to all LLCs filed in Iowa after January 1, 2009. The new LLC law will apply to older LLCs beginning on January 1, 2011 unless otherwise agreed by the members.

In my last blog post I picked on the new Iowa LLC law because I don't see great benefits to LLC members with some of the changes in the law related to operating agreements. But changes relating to Statements of Authority may not be so bad. (That is if you are an LLC owner. Third parties might disagree). 

Currently, Iowa LLC law says that all members of the LLC are agents of the company unless otherwise stated in the articles of organization. The new LLC law provides that members are no longer automatically agents of the company. As fellow Iowa business lawyer Marc Ward points out on his blog, "The risk of a rogue member binding or otherwise obligating the LLC will be gone."

The new law also permits an LLC to file a statement of authority with the Iowa Secretary of State. (Still amazing to me the Sec. of State has no notice of the new LLC law on its site). The statement of authority will serve as notice of who does or does not have authority to act for the LLC, sign documents transferring real property, or otherwise act for and bind the LLC.  The statement can state the authority or limits on authority by position (e.g. member, manager, president) or a specific person or persons.

Third parties will need to be careful in assessing whether a member actually has authority to sign on behalf of the LLC.  In doing so, third parties probably should request a copy of the Statement of Authority documentation from the LLC. This information will also likely be viewable on the Sec. of State's Web site under the Company's  filings. It will be interesting how courts will handle the issue of "apparent authority" under the new law (i.e. where a person purports to have authority to bind the company but really doesn't). After all, the whole purpose behind the provision is to prevent rogue members from binding the company. Is "apparent authority" thrown out the window if a Statement of Authority is filed?

A statement of authority filed in the county recorder's office will be conclusive evidence in favor of a person who gives value for real property in reliance on the statement.  Similarly, a filed statement limiting the authority of a person or position to transfer real property will constitute notice to all.

Under the new law, a statement of authority will expire 5 years after it or the most recent amendment becomes effective, unless canceled earlier.

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This blog post is second in a series of blog posts highlighting changes in the 2009 Iowa Limited Liability Company Act. The new law applies to all LLCs filed in Iowa after January 1, 2009. The new LLC law will apply to older LLCs beginning on January 1, 2011 unless otherwise agreed by the members.

Beginning in 2009 there are a couple of issues relating to operating agreements that LLC business owners must consider. The operating agreement is the document that sets forth how the LLC is governed and run.

1. LLCs are not required to have an operating agreement in writing but watch out. On its face the fact an operating agreement is not required in writing might excite LLC owners. However, it is not advisable to go without a written operating agreement, particularly if there are two or more members in the LLC. Even a single member LLC should consider a written operating agreement in order to protect against piercing the corporate veil. If an operating agreement is not in writing, the provisions of the new statute will automatically apply to the LLC. In many instances, the statute has provisions that may surprise and bite unknowing LLC owners especially with regard to management rights, profit distribution and transfers of interest. It is best practice to have a written operating agreement.  
2. Operating Agreements may be amended orally. LLC owners may amend their operating agreement orally under the new statute. Again, while that may make it easy to amend the agreement it will likely remain best practice to override this statutory provision to include language in the written operating agreement requiring an amendment to be in writing. That way members may avoid the enevitable arguments that ensue when agreements are not memorialized in writing. People tend to remember things differently when agreements are not in writing and the agreement is more difficult to prove in court.

Check back for more on the Iowa LLC law changes in future blog posts.

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This blog post is first in a series of blog posts highlighting changes in the 2009 Iowa Limited Liability Company Act. The new law applies to all LLCs filed in Iowa after January 1, 2009. The new LLC law will apply to older LLCs beginning on January 1, 2011 unless otherwise agreed by the members.

Beginning January 1, 2009, you will no longer file Articles of Organization with the Secretary of State to start your Iowa limited liability company. Instead, you will now file a Certificate of Organization to begin the process. Unless there are changes with the Secretary of State, I do not anticipate the filing fee would change from the current fee of $50.00. (Amazingly, the Iowa Secretary of State's Web site has no mention of the upcoming changes that I could see). 

The Certificate of Organization under the new Iowa LLC law will actually have less detail than Articles of Organization typically had in the past. The only information required for the Certificate of Organization are as follows:

1. The name of the limited liability company;
2. The street and mailing address of the registered office and the name of the registered agent.

That's it. The organizer also won't need to state the the LLC has a perpetual duration in the articles as the new law automatically provides that LLCs have a perpetual duration (just like corporations).

Now, that may seem simple enough to start but there are a number of issues with the new Iowa LLC law that could trap unsuspecting business owners. I will highlight some of those areas in upcoming posts. 

An excellent resource on the this topic is Ward on Iowa Limited Liability Company Law, written by Marc Ward of the Dickinson Law Firm. Marc has devoted an entire blog to the changes in the new Iowa LLC law. 

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There are significant changes to the Iowa limited liability company (LLC) statute effective January 1, 2009.  The changes include everything from how an LLC is initially formed and filed with the Secretary of State to changes that apply when a member leaves (i.e. disassociates) from the LLC.

Check back over the next couple of weeks for a series of posts regarding the new changes in Iowa's LLC law.

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A great discussion took place last Friday on Twitter among several young entrepreneurs in the Des Moines area. As a result, Daniel Shipton of Impromptu Studio took the bull by the horns and organized an "impromptu" entrepreneurial roundtable discussion for this Tuesday, December 9th from 12:00 p.m. - 1:00 p.m.

The anticipated roundtable will consist of Matt Kinley of Equity Dyanmics, representatives of the Technology Association of Iowa and several local entrepreneurs.  So if you care about the entrepreneurial climate here in Iowa be sure to participate.  I'll see you there.

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There are many entrepreneurs who want to run all their business AND personal expenses through the business.  For example, earlier this spring I witnessed a father buying his son's baseball equipment at a local sporting goods store.  I chuckled when he pulled out a company check to pay for the equipment.  Sure, one expense might get buried and never noticed in an audit but experience tells me that "pigs get fat while hogs get slaughtered."  Many business people don't understand where to draw the line.  Business expenses are fine to deduct.  But  running obvious personal expenses through the business just isn't acceptable.  It could even be a reason to "pierce the corporate veil" in litigation causing you to lose your limited liability protection. 

But where it may really hurt is when you go to sell your business. That is when it is critical to show the best possible operating profitability and cash flow to gain a fair price for your business. This means those avoidable (or perhaps illegal) expenses take away from the bottom line of the business and leave you with less value.  Moreover, it draws questions about your integrity and could make it harder to sell our business.

So keep the end in mind. Accurate and organized financial statements are a must. A penny saved today might be a dollar lost tomorrow.

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Last December I wrote a blog post on how Iowa has never been the hot bed for franchisors but it seemed as though some Iowa franchisors were really picking up steam.

Now we are pleased to announce that our new franchise client, The Pink Hippo , just completed its first franchise sale in Urbandale, Iowa and will soon be expanding to other states. The Pink Hippo specializes in the sale of hairbows and other accessories for young girls.  Julie Nitchie and Gretchen Stevenson are motivated entrepreneurs and have developed a unique franchise offering. Our services for the Pink Hippo included completion of their franchise disclosure document and franchise agreement plus assistance with the development of their franchise operations manual.

Congratulations to The Pink Hippo and we wish them continued franchising success.

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I recently received an email from a business brokerage advertising their services.  In the email the brokerage said they have "low-risk" businesses and franchises for sale. While that may make for good marketing - I must unfortunately say that "low-risk" businesses do not exist in my opinion. If our struggling economy has shown us anything, it has demonstrated that risk is inherent in business. To advise otherwise minimizes the enormity of the decision to purchase a business.

Now don't get me wrong. I am not knocking the business brokerage. It's their job to sell businesses and that's just what they are attempting to do. But the prospective buyer should be more cautious and take the time to understand the inherent risks of ownership in the business you intend to buy.  It is absolutely critical to conduct due diligence. Appropriate due diligence includes examination of the following areas in the business:

• Organizational documents and good standing with state and/or federal authorities
• Financial information
• Physical assets
• Real Estate
• Intellectual property
• Employees and employee benefits
• Licenses and permits
• Environmental issues
• Taxes
• Material contracts
• Product and service lines
• Customer information
• Litigation
• Insurance Coverage
• Professionals
• Articles and publicity

See this due diligence checklist for more details.  It is a very comprehensive checklist.  The level of due diligence will likely vary with the size of the business transaction but this list should give you a good outline of the issues to consider. 

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It has taken longer than I had hoped but my November goal is to lauch the Interactive Learning Environment for clients and others interested in employment law compliance and training, franchising basics and starting up your business.  Our initial free program will include a Legal Guidebook on Starting Your Iowa Business.  Gradually, we will release more and more content on the important issues that impact your business. One of my partners, Matthew Brick, will be a major contributer on employment law issues.

My introductory video is complete so I need to get moving on the programs. Due to time constraints with work load and this project, followers should expect blogging to be very light over the remainder of the month. I appreciate your loyal support to this blog and I encourage you to give our ILE a try when its finished. 

A special thanks to the guys at createWOWmedia who have been so invaluable in getting the ILE project off the ground. Stay tuned for the finished product and I look forward to your comments once we are up and running.

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The ABA's Forum on Franchising is this week in Austin, Texas.  Another all-star lineup features an intensive program about learning from mistakes under the new FTC rule.   Again, there are several other terrific programs.  One of the more interesting talks is about franchising in the BRIC markets.  (Brazil, Russia, India and China).  Like the US, those markets have experienced an economic downturn.  How will that impact franchising development in those countries?  

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Juice Magazine recently interviewed me for an article on how to start your own business. I offered the following tips to new business owners:

• Get agreements in writing up front, whether it's a few hundred dollars or larger.
• Small business centers are a good place for people to start. It's often a good place for people to go get some counseling.
• You should be very careful if you're going to go into business with partners. You should draft a buy-sell agreement that outlines how the business will be run, and what happens if one of them should die or want to leave the business. Whether it's family or friend. 

I also thought Iowa intellectual property attorney Brett Trout offered some excellent advice by recommending that new business owners obtain a federal trademark for their business name or product. In this flat world it is more important than ever to protect your intellectual property. A federal registration is significant because it enables you to collect attorney's fees and treble damages under certain circumstances in a trademark infringement lawsuit.

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The Ohio Practical Business Law Blog examines the new Franchise Disclosure Document (FDD) a recent post.  The new FDD rules began in earnest  on July 1, 2008.  

Previously I posted on some of the key differences between the old UFOC rule and the new FDD rule including:

• Use of unaudited financial statements.  Start-up franchisors may phase-in the use of audited financial statements.  In this case the franchisor must clearly and conspicuously disclose that the franchise has not been in business for three or more years and cannot include all required financial statements.  (There may still be requirements to submit audited opening balance sheets in registration states).  Franchisees should make sure to review the financials carefully as always.
• Financial Statements.  The FTC will allow the use of financial statements prepared according to U.S. generally accepted accounting principles ("GAAP").  There must be separate audited financial statements for any parent that "commits to perform post-sale obligations for the franchisor or guarantees the franchisor's obligations" in the disclosure document.
• No Broker Disclosures.  The Amended FTC rule eliminates the broker disclosure requirement.  However, the broker will need to be listed on the Receipt Page because the Receipt Page requires the franchisor to identify all "franchise sellers".
• Litigation.  Franchisors will be required to disclose material franchisor-initiated litigation against its franchisees.  The rule will be more lenient as a franchisor will only have to disclose actions that the franchisor filed during its last fiscal year - not the last 10 years. Further, a full description of the case will not be necessary.  If a counterclaim is filed against a franchisee the disclosure will need to be treated as any other franchisee-initiated action and the regular, full disclosure will be required.  (Franchisees will need to more fully investigate whether franchisor-initiated litigation occurred whether it is in the disclosure document or not).
• Financial Performance Representations.  The new rule encourages franchisors to provide financial performance representations but it is still voluntary.  Franchisors may provide a more detailed cost and expense analysis which could be helpful for prospective franchisees.  Also, franchisors may provide financial representations based upon a subset that shares the same characteristics. 

There are other differences so be sure to talk with an attorney experienced in franchise matters if you are looking at purchasing a franchise. 

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I received word today from conference organizers that the inaugural Midwest Small Business Conference has been canceled.

Hopefully organizers can give it try again next year. I thought it was a great lineup. Too bad it didn't fly. 

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The bailout is not universally popular with Main Street America but the International Franchise Association says a bailout is needed because our credit crisis "threatens to derail the future growth of franchised businesses because it undermines the health of credit markets as well as equity markets."

There is no doubt Wall Street is hoping against all hope that a bailout occurs.  If it the legislation isn't passed I have heard pundits predict the DOW could drop as low as 8,000.  More banks would fail, retirement accounts would plummet and a lengthy recession could occur.

But I have mixed feelings about this bailout.  Should bad business decisions be rewarded?  Most of the business people I represent rightly remark, "I don't get a handout, why should they?"  Should we just let the market work itself out?

Columnist Rhonda Abrams urges that small businesses need direct help. Some of the areas Congress could help small businesses include giving tax credits for hiring your first employee, credit card fairness, SBA disaster assistance loans and estate tax reform. Generally, franchisees are of the small business variety.  It seems they would benefit more if direct help occurred from Congress rather than just bailing out the largest financial institutions in America.

It's tough to know the answers and I don't pretend to be an economist. I have talked recently with several local bankers concerning the current economic climate.  The bankers have told me they are still making loans and actually have some optimism for the Iowa economy.  That flies in the face of a recent report indicating that West Des Moines is No. 4 on the list of the towns that could be hardest hit by the financial crisis.  I hope the local bankers are right.

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The Midwest Small Business Conference is now set for October 10 & 11, 2008 at the Des Moines Marriott.  This event is rescheduled from the previous announcement on this blog because the original date conflicted with the Iowa-Iowa State football game. (Conference organizers learned that not even business gets in the way of football).  Fortunately the conference was able to pick up a new date and additional speakers.

I will be speaking on how to keep your business out of court.

Click here for a lineup of the conference speakers.  We hope to see you there!   

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I am honored to be included among the Alltop franchising news selections.  Some exciting things have been happening for me on the franchising front including developing the franchise disclosure document and franchise agreement for a new local franchisor, the opening of a client's new Max Muscle franchise location just on Thursday and the completion of a franchise litigation dispute.

I am also excited to attend the Forum on Franchising in Austin, Texas this October.  Last year's seminar was one of the best I have attended.  Given this year's lineup I am sure it will be equally as good.

Thanks to Joel Libava of Franchise King Blog for suggesting this blog for Alltop. 

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It's so simple.  Everybody knows you get agreements in writing, right?

Then tell me why so many people ignore this most important axiom in the business world.

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I connected this morning with Tyler Osby of Four Legacies Mortgage.  I met Tyler through Twitter (you can follow him @tylerosby). I have been impressed with the breadth of information he provides.  He uses Twitter in a very meaningful way by acting as a resource on the mortgage market. 

Tyler brought up a great point today during our discussion.  When someone starts a business they must demonstrate at least TWO YEARS of verifiable income, assets, credit history and tax returns before the new business owner will be able to get a new mortgage.  It's something I've always known but never really discussed much with clients when they are forming a new business.

So if you are planning to start a new business be sure to review your mortgage interest rate.  Otherwise, it may be a couple of years before you can do much about it.  

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I have seen many articles on the Internet which state that you absolutely need to form a limited liability company (LLC) if you are a small business owner.  The S corporation, once the darling of small business entities, is probably feeling a little lonely these days.

One important aspect of the S corporation is that you may be able to save on self-employment taxes by using an S corp instead of an LLC.

But don't get too carried away in the belief that you can set a low salary says accountant Joe Kristan in his latest post on Iowa Biz regarding s corporation salaries.  The key is to set a "reasonable salary" if you are the owner, although admittedly no one really knows what that means.

As is often the case in dealing with tax issues, Joe's advice is to remember that "pigs get fat, but hogs get slaughtered."  It's definitely a good idea to talk with an accountant when setting your salary in your S corporation.  It could save you considerable time and expense in dealing with the IRS. 

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A recent article from the Wall St. Journal online discusses something I thought I would never see from a franchisor: A money back guarantee. 

Others are not convinced and warn to investigate the details carefully in the Franchise Disclosure Document.  

Thanks to Joel Libava for pointing out the article.  Joel is a franchise consultant from Cleveland,Ohio that publishes an extraordinary amount of content regarding franchising.  Both the good and the ugly.  And never dispassionately.  Be sure to check out his Web sites if you have an interest in franchising.

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Twice a month I blog for IowaBiz which was acquired by the Des Moines Business Record this summer.  Since that time it appears the bloggers have stepped up their game.  The posts have been informative and entertaining.  I encourage you to take a look.

My post today for IowaBiz centers on the trend of hiring outside law firms on a non-billable hour basis.  It's a trend I embrace and use frequently in my law practice.  Similar to the law firms mentioned in my post, I have already provided outside general counsel services to certain business clients based upon a mutually agreeable fixed monthly fee.  These clients receive a fixed monthly bill and do not receive bills for phone calls and overhead costs such as copying and postage.  I also have performed certain projects such as incorporation and LLC formation on a fixed rate and have also done so with contract review and writing.  No, I have not completely eliminated the billable hour from my practice but would love to do so.

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Great post from Susan Reid on the Small Business Trends Web site on the 15 Ways the Olympics Exemplify Success for Small Business Owners.  In the comments of Reid's post, Anita Campbell has some terrific words about West Des Moines, Iowa's very own Shawn Johnson.  Johnson definitely made us all proud with her amazing attitude and fantastic performance.

But I'll add one to Reid's list:

Be Honest.  Although you may initially capture the gold it certainly won't be worth the consequences if you are caught being dishonest.  It includes your dealings with the IRS, customers, suppliers, employees and business partners.  The dishonest small business owner will likely get sued, or worse, end up being prosecuted.  And with the Internet it is very hard to keep your reputation quiet.

photo of Shawn Johnson in butter at the Iowa State Fair on Flickr by Iowaarcheryboy.

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I will be speaking at the Midwest Entrepreneur and Small Business Conference scheduled for September 12 & 13 at the Jordan Creek Marriott in West Des Moines.

I encourage you to check out the preliminary presenters' list for this first of its kind conference in our community.  Hope you will consider attending.

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Gavin Craig in his new Twin Cities Business Litigation Blog has an excellent post on the importance of making sure the world knows you have a corporate entity.  Craig is convinced that many small business owners (especially contractors) do not know how to properly operate a corporation or LLC. Craig says,

When a person incorporates their business, it takes more than just filing a form with the Secretary of State. When a business is incorporated, it can't be a secret to those that do business with the new corporation. In other words, the new corporation needs to disclose the fact that the business (the party that is contracting with others) is incorporated on its letterhead, business cards, invoices and checks.

Craig is right on with his warning on this issue.  Whether you live in Minnesota, Iowa or Timbuktu, you must make sure you disclose the fact you have a corporate entity on your letterhead, business cards, invoices, checks and especially CONTRACTS. 

This is a particularly important message for franchisees.  Many franchisees operate under franchise trade name but fail to disclose in contracts, letterhead, business cards, etc. the name of their actual corporate entity.  One franchisee I know was personally sued for the damages related to an advertising contract because he had not disclosed to the other side that he actually operated with an LLC rather than as a sole proprietorship.  He had signed the contract using only the trade name of the franchise.  The other side said at trial that it didn't know the franchisee had an LLC.  So ultimately the judge sided with the advertising company.  It was an expensive lesson that could have been easily avoided. 

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Many people dream about owning their own business.  More and more people are choosing franchising as the avenue to to pursue these dreams.

The Federal Trade Commission (FTC) has excellent information in its consumer guide for buying a franchise.  The FTC recommends that BEFORE you invest in or select a franchise you should think about how much money you have to invest, your abilities, and your goals. The guide warns you to "be brutally honest."  Three key areas are listed:

1.  Your Investment - How much do you have to invest?  How much could you afford to lose? Do you need financing? What's your credit score?  Do you intend to invest with partners? How much do you have in savings?

2.   Your Abilities - Does the franchise require special education, expertise or training?  What skill sets do you bring specifically to this business?

 3.  Your Goals - Do you need a specific annual income?  Do you have interest in a particular field?  Are you interested in retail or service?  How many hours can or will you work?  Do you intend to hire a manager or run the business? Is this a primary source or supplement to income? Do you get bored easy or are you in it for the long run?  Would you like to own multiple locations?

One of the biggest questions to ask yourself in my view is whether you are just buying yourself a job.  If you buy a franchise you should treat it like an investment and expect a return on that investment.  Otherwise, you are most likely better off just looking for employment.  It's certainly less risky and considerably less stressful. 

In the next post we will examine what it means to "buy yourself a job" and how to avoid that trap.

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Franchisee lawyer Richard Solomon has a passion for spreading the word about conducting pre-investment due diligence.  His latest post on the BlueMauMau site outlines many of the pitfalls experienced by franchisees in various industries.  It also discusses the fact that a mere review of the franchise disclosure document and franchise agreement is not enough.  On that subject he says,

Every failed franchisee hired some cheap lawyer to “read the contract”.  When you add up what you are risking, you will appreciate that a few hundred dollars for an incompetent review of documents by someone who doesn’t know where else to look for what needs to be considered is really stupid. You can’t afford that approach. But it’s your money and your decision.  

I agree with Richard that due diligence is critically important.  I also agree that prospective franchisees must do more than just read the contract (i.e. Franchise Agreement and Disclosure Document).  Real due diligence will require a multi-disciplined approach.  The prospective franchisee should get a lawyer, accountant, banker, and even a marketing professional into the decision-making process.  If a specific location is key (such as retail or restaurants) you will want a commericial real estate agent also involved.

But above all, the franchisee must become engaged in the process.  Don't rely on the professionals to do the hard work for you.  You must roll up your sleeves and investigate.  In the next post we will discuss more of the details about how conduct franchise due diligence.    

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These posts demonstrate some good business basics:

Small Biz Survival has a good blog post on how to keep good tax records. 

Kyle Kruidenier of the Iowa Law Blog talks about the importance of thinking with the end in mind when forming a business.

Marc Ward shares why LLC operating agreements should be in writing.

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Nothing like a good article on franchising to bring me out of a blogging hiatus that I anticipated would last at least another week.  But thanks to the Small Business Trends site and franchise consultant Joel Libava, my rest is over.

The Franchise King posted on a Central Ohio restaurant franchise called Roosters that seeks experienced franchise operators rather than newbies that might not understand the industry.  Like Joel, I agree it's a good concept for a franchisor to target franchisees that have experience in the industry.  Experienced operators are much more likely to be successful.  We agree on that.  We actually couldn't agree more on that.

However, Joel doesn't carry that logic forward when it comes to working in a franchise before buying one.  Joel says he is often asked this common question:

“Joel, are there any franchise companies out there that will let me work with a local franchisee, to see if I like the business?” 

And being the laid back guy he is (now don't get me wrong, Joel is a well-intentioned guy who wrote a book on Franchise Research Steps), Joel responds with an emphatic "No!"  He doesn't recommend it because the franchisee won't get the full story.  After all, they don't have any "skin in the game, so how could they possibly understand what the franchise business owner is going through?  He more or less says that if you aren't willing to go "all in" from the outset perhaps you should take it as a sign that you shouldn't go into business for yourself.  (Unfortunately too few people will heed this advice in my experience and take it as a personal challenge to go forward).

So it's my view working in a franchise business BEFORE buying doesn't make you a chicken!  In fact, it may be the best due diligence any prospective franchisee could do.  It's the same reason why so many successful business owners were once employees of the business they ended up buying.  It's the same reason a successful franchise owner I know worked in retail for a year before buying a retail franchise.  She wanted the experience.  No, she NEEDED the experience before investing much of her life savings.    

Now, it's true that some prospective franchisees might not benefit from the experience.  Some prospective franchisees have no business ever owning a franchise or any other kind of business.  But to say all prospective franchisees shouldn't avail themselves of the opportunity to work in a franchise system seems a bit bold in my opinion.  As a franchisee and reader of this blog pointed out:

The most difficult information to obtain and verify is franchisee profitability.  The profitability of the franchisor and the franchisees is not always related.  Sometimes those selling franchises make money while the franchisees do not.  And it is not always due to lack of due diligence on the part of the franchisee.  It may be because of inaccurate information supplied by the seller or franchise support that was promised but never delivered.

Risk is inherent in any business venture.  You are taking a chance and a leap of faith.  But actually working in a franchise business before you buy may allow you to find out whether you want to stake your life savings on the opportunity.  Taking a chance with maximum information is not random chance but a calculated risk - and that could make all the difference.

photo on flickr by ™bluhousworker and original photo by TedSher

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All Business has a decent article describing the ten key provisions of a franchise agreement.  However, I do take issue with the comment in Section 1 that "most franchisors offer ongoing support including administrative and technical support."

As I discussed in my last post on franchising, it is my experience that "most" franchisors DO NOT offer much in the way of ongoing support including administrative and technical support.  I believe this is a major item that separates the good franchisors from the bad ones.  And trust me, the MAJORITY of franchisors I have seen are downright awful in this category.

The majority of franchisors are good at only one thing - getting you into business.  After that, you're on your own and you'll be left to wonder why you are paying all those franchise royalties.  Perhaps harsh words for the industry overall but the truth hurts.  If you are buying a franchise make sure to do your due diligence and find those franchisors with a system for ongoing support.  Otherwise, why buy a franchise?

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With the help of Doug Mitchell and Andy Brudtkuhl I will be going live with an Interactive Learning Environment to complement this blog very soon.   The Rush on Business Legal Wire will focus primarily on employment law, franchise due diligence  / investigation issues and business purchase or sale considerations.  I also hope to attract top speakers to participate in the process.  The online seminar presentations will include in-depth written materials, audio presentations, podcasts and possibly video.

Forums will also be available for you to share your insights and ask questions.  Similar to the blog format, I won't be able to answer questions regarding specific situations but we can discuss topics generally.

I welcome your comments and suggestions on topics you would like to hear more about.

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Don't forget that Iowa's smoking ban in public places starts July 1, 2008.  If you are a business interested in learning more about compliance with the new law please visit the Iowa Department of Public Heath site at www.iowasmokefreeair.gov.

An informative Q & A concerning the smoking ban is available here.

Bar owners in particular are upset about the new law.  Is a challenge in the works?

photo on flickr by greefus groinks

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While discussing a franchise case recently an attorney working with me observed that the franchisor really didn't agree to do anything for the franchisee in its franchise agreement.

Unfortunately most franchisees are under the mistaken belief that franchisors will provide all kinds of support.  When it doesn't happen and the business relationship has fallen apart, the franchisee is surprised to learn that the franchisor isn't contractually obligated to do much of anything.  Which generally means that if a lawsuit occurs the franchisee may have very little recourse.

The solution:  Franchisees should discuss specifically with the franchisor exactly what the franchisor is going to do to support the franchisee during the term of the agreement.  If the franchisor makes promises that are not contained in the franchise agreement, ask for those promises in writing.  If the franchisor won't put those promises in writing be ready to walk.   And never, I mean NEVER, believe the franchisor that tells you they won't hold you to the terms of their written agreement.  You can be assured that the franchisor's lawyer in any lawsuit will never acknowledge that such a statement was ever made and most franchise agreements are written so that any such statement could not be used as evidence anyway.

Ulitimately there is no validity to the claim that franchise operations are less likely to fail than non-franchise operations.  A franchisor that just gets you into business doesn't offer you much.  Always do your homework, ask the tough questions and demand answers.

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Indiana civil and business lawyer Sam Hasler recently expressed his view that the place to incorporate your business is generally in your home state.

I agree with Sam. 

Delaware or Nevada may offer viable options for some companies but in general most Iowa small businesses are probably wise to incorporate here in Iowa.  First, Iowa has very low fees when it comes to incorporating your business.  It is a $50.00 fee to file Articles of Incorporation for a domestic corporation in the state of Iowa.  Further, it only a $30.00 fee every two years for a biennial report if you file online.  These fees are extremely low compared to other states.

Second, you won't avoid Iowa taxes by incorporating your Iowa small business in Nevada or Delaware if you are doing business here in Iowa.  The tax and corporation laws of Iowa will require you to register your company and pay fees as a foreign corporation in Iowa and you will be required to pay Iowa state income taxes for any income earned.  (You also do not avoid federal income taxes by incorporating in Nevada despite the lack of an information sharing agreement with the IRS).

And the perceived court advantages in Delaware?  That might be fine for a large business that is actually going to litigate a case in Delaware but it is probably not cost effective for most Iowa small businesses to litigate their cases in Delaware.  Besides unless you have well-written forum selection clause in contracts your Iowa small business will likely end up in Iowa courts anyway.

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Do you have bad credit?  If so, this article on how to qualify for a franchise loan even with bad credit may interest you.  But please don't be offended when I say I hope you don't get the loan.

The number one reason I see for business failures is the lack of sufficient capital.  I have seen several people invest their entire life savings only to have their business fail because they lacked the money to survive the first 6 to 24 months.  These overly optimistic business owners scraped the money for the initial loan but had no room for error.  When the business didn't cash flow right away they were doomed.

My advice is simple for those that have bad credit and want to start a business.  Work on improving your credit and accumulate cash to invest in your business. You should plan on having at least double the capital you believe you need.  If you have the idea you just cannot pass up at this time you may need to go raise capital through a rich uncle, an angel investor or venture capital.  If you are investing in a franchise operation as discussed in the article you can probably forget about venture capital.  It's not likely to happen.

I am not saying every person with bad credit shouldn't consider starting a business.  But the odds of business success (a difficult task under the best of circumstances) go down measurably when the potential business owner cannot manage money well and does not start out with adequate capital.  A much better article would have been about how someone could improve their credit and increase savings to start out a business on solid footing.  Providing loans to those that cannot afford them is not the recipe for business success.  After all, it's the same mentality that caused the mortgage crisis our nation currently faces.

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Tomorrow's BIZ networking luncheon features Jonni Tonnemacher, a CPA specializing in fraud detection services.  Learn how to identify fraud in your business and implement controls to prevent fraud from occurring.

I have not heard Jonni talk previously but the topic is fascinating.  It is downright scary how much fraud occurs in business.  Don't be a victim.  Be informed.

Read more about the offerings of BIZ at www.bizci.org.

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I am frequently involved with the purchase and/or sale of a business.  Often the purchaser discovers the business through a business broker.  In the Des Moines area, it seems as though several of the business brokers convince prospective buyers to make an offer before seeking legal advice or reviewing the basic terms before the offer is signed. (i.e. price, financing terms, earn-out, non-compete, etc.).  The selling point is that the broker's form offer to purchase makes the agreement contingent upon review by professionals including a lawyer and/or accountant. 

While the contingency is a good one, the problem is that it does not replace a consultation with a lawyer or accountant before the offer is made.  The simple reason is that once the offer is made it creates a binding agreement.  If you fail to consult the lawyer before signing the offer the basic terms of the sale are complete.  At that point, the lawyer may be able to help you with the legal wording in the final contract but it is awfully tough to change the terms of the deal.

So if you are purchasing a business be sure to consult a business lawyer before signing the offer.  Don't fall for the notion that a contingency permitting legal professionals to review the agreement will allow you to change the terms of deal in the final agreement.  Once you sign the offer it is probably too late.

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Former general counsel and small business owner, Anita Campbell, offers sage advice in her post on the Build a Solo Practice Blog about how to write a better contract .  What is the better contract in Anita's view?

1. First and foremost, the better contract protects the client.
2. The better contract is written in plain English.  (A novel concept indeed!)
3. The better contract is written for a 12th grade education or lower.
4. The better contract incorporates standardization.

A word of caution concerning standardization of contracts:  Clients will often take a standardized contract and fail to adapt it appropriately for the current business transaction.  Clients should be reminded that it is a good idea to have the business lawyer review the agreement to make sure it adequately protects the client in the current transaction, contains the actual terms of the current transaction and fulfills the goals of the current transaction.  I can't tell you how many times I have seen the embarassing situation where a business person took a standardized contract and failed to revise it appropriately for the situation.  It happens often when people pilfer agreements from the Internet and fail to modify the terms.  If litigation occurs, the result of this carelessness could be a verdict against the client.

Anita's solution involves providing a set of instructions to the client along with the standarized contract.  Included in the instruction sheet is the direction to have the business manager consult the corporate lawyer before signing or implementing the agreement.  This may work well with organizations that have in-house counsel but is probably less intuitive for businesses with outside counsel.  I offer the reminder to always have contracts reviewed by your business lawyer.

Hat tip to Susan Cartier Liebel and her Build a Solo Practice Blog.  Susan is passionately building one of the best blogs in the country.  Notice I didn't limit it to legal related blogs either.

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The Small Business Administration (SBA) and FranNet have teamed up to offer an online training course for those interested in franchising.

The free online course on franchise basics provides three key sections that examine more than 10 essential areas relating to franchising, including Whether Franchising Right for You and How to Choose the Right Franchise. The course also covers franchising options, strategies for growth, and pitfalls to avoid. Course participants will be able to better understand franchising and decide if it is the best small business option for them.

For more information please be sure to contact Joe Cooney who is the FranNet consultant for the Iowa / Nebraska region.  I have found Joe to be a very helpful resource.

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Anita Campbell of Small Business Trends shares her thoughts about how to avoid the contract from hell on the Build a Solo Practice site. 

As a former general counsel and now a small business owner, Anita has been on both sides of the fence when it comes to contracts.  According to Anita, here are some things to avoid in your next contract:

• Too much legalese.
• Using adverbs like "whereas" and "heretofore".  It's kind of like using "COMES NOW" for pleadings.  Does anyone really talk like that?
• More than 5-7 defined terms.
• Attaching multiple exhibits.  I can speak from experience that multiple exhibits is a real pain for the drafter so I can't imagine what it is like for the reader.
• Making it so hard to understand that it leads to avoidable litigation just because no one can understand it.

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Teri Rasmussen of the Ohio Practical Business Law Counsel blog has gathered some excellent resources for those who are interested in pursuing a franchise to start a business.

Thanks to Teri for referring to a couple of my blog posts but I also recommend checking out the Small Business Administration's consumer guide to buying a franchise as well as attorney Mike Hamblin's 4-part series on franchising.

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Do you have an estate plan?  It has been reported that approximately sixty percent of people in the U.S. do not have a will.  Of course having a will is critical if you have children but let's not forget about another baby - your business.

As the owner of a closely held business much of your wealth may be tied up in the business.  If you have not planned properly you may cause tremendous problems for your heirs.  After paying probate and estate taxes your heirs may also encounter liabilities that were payable upon your death.  All this during a time where the business may have decreased revenues due to your death.

Fortunately proper planning may eliminate many of these problems.  Using buy-sell agreements and trusts are two of the ways that business owners can protect their assets and reduce taxes.

Another important life-goal for business owners is charitable giving.  This week's Des Moines Business Record has an informative article on available options for starting your own philanthropic legacy. 

Even if you are young, consider an Acorn Fund through the Greater Des Moines Community Foundation.  For an initial contribution of $1,000 and a commitment of $600 per year until the amount equals $10,000, a young business owner could start their own permanent endowment fund.  And not only do you get the deductions for charitable contributions but you may also be eligible for additional tax credits.

photo on flickr by Norma Desmond

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One of my franchisee clients offered a very simple question that every prospective franchisee should ask of other franchisees when conducting due diligence:

What doesn't the franchisor do well?

He says this evoked the best responses from franchisees when he conducted his due diligence.  If you are considering a franchise be sure to talk to as many franchisees as possible.  Speaking to only a handful is not enough. 

For more information be sure to read this article on franchise due diligence resources.

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A new program from the non-profit Iowa Foundation for Microenterprise and Community Vitality (IFMCV), will provide a statewide mechanism for Iowa's microentrepreneurs to connect with community development agencies for assistance. Among the groups spearheading the effort are the Greater Des Moines Community Foundation and the Community Vitality Center (CVC), a policy analysis center based at Iowa State University. The program specializes in providing loans of $35,000 or less to small businesses.

State legislators are considering ways to fund microenterprise assistance programs that would be offered through the Iowa Department of Economic Development. An appropriations bill now under consideration would provide $500,000 to fund a microenterprise specialist at the IDED and begin a microloan program, using unspent Grow Iowa Values Fund dollars.

These are exciting developments for the state's small businesses which have long been ignored in Iowa. For more information please read this article from the Des Moines Business Record.

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It's no April Fool's joke, the Iowa Secretary of State corporate biennial reports are due today, April 1, 2008.  If you have not filed your report be sure to do so today.  In Iowa, limited liability companies are also required to file the report.  If you file online the cost is $30.00 for the filing fee.  The cost is $45.00 if you file a paper report.

If you do not file your report a notice is generated and eventually your corporation will be administratively dissolved after the notice.  You can get your corporation or LLC reinstated but that will cost you additional time and effort.  You also cannot get reinstated unless you have paid all applicable state taxes.

So get your report filed today.  If you know your corporation # and pin # you can file the report by going to the following link:

https://www.sos.state.ia.us/BiennialReports/index.asp

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Ohio business lawyer Terri Rasmussen has an excellent overview of the resources available on the SBA Website.  (With a hat tip to Joel Libava on the Small Business Trends Blog for the original post).  Terri also refers to a helpful post from Anita Campbell on the Ten Ways Business.gov Helps Your Business.

While I couldn't agree more with these posts about the valuable information found on the SBA Web site, I would add I find the Kauffman eVenturing site to be one of the most useful business resources on the Internet for pure business advice and information.  The quality of the ideas and writing on the Kauffman site is outstanding.

P.S.  If you are looking for an interesting interview, be sure to take some time to listen to Central Iowa's very own Sherry Borzo interview Anita Campbell on the dsmBuzz site.  It's terrific!

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A cautionary tale about partnership from Richard Fox on the Kauffman eVenturing site is an absolute must read.  Fox shares how he thought his legal background would protect him well as he created shareholder agreements, buy/sell agreements, voting trusts, special bylaws and articles of incorporation when he entered into a business partnership.  But even he was surprised when a 50 percent partner tried to sell the company out from underneath him after his father's funeral.  To make matters worse the partner tried to sell the company to their number one competitor.

Fortunately for Fox he was able to ultimately sell the company for a handsome price because he continued to concentrate on building the business rather than retaliating against his partner.  But it's pretty clear Fox believes any business person should be extremely careful when taking on partner.  He offers the following priceless advice (with my comments following):

• Know Your Existing Shareholders' Rights. Shareholders of private companies—even minority shareholders—hold the same legal rights as shareholders of public companies. When you accept shareholders, you accept the same scrutiny that comes with being a public company without the benefits. Understand that you can never be adequately prepared for a shareholder who wants to maliciously assert their shareholder rights to cause you problems. 

(Comment:  In Iowa, all shareholders are entitled to the financial information of the company as well as copies of all corporate documents   I strongly suggest you keep all copies of all important corporate documents and financial information routinely, not just when you need them.  In particular make sure you have any documents that would evidence ownership rights.  It is my experience that often one partner will have access to the corporate documentation while the other partner does not.  Don't let that happen to you).

• Avoid Taking on New "Legal" Shareholders. Entrepreneurs sometimes give ownership interests to key employees to allow them to share in the equity growth of the business. For the reason stated immediately above, you might consider offering "phantom stock," (read this article for more on phantom stocks) which carries all the economic benefits of common stock ownership without the potentially abusive rights of legal ownership. A lawyer should be able to advise you on the details. 

(Comment:  My experience with clients is that most employees really want to be paid more.  I know entrepreneurs often want employees to feel as though they have a "piece of the action".  But I also caution you to think twice about employee ownership).

• Take the high road. Rather than counter-suing the partner, Fox chose to put his energy into building the business. Not only was it good for the business, but it kept from muddying the waters any further and made a much needed ally out of the company's other corporate director. 

 (Comment:  This is very difficult to do is some situations.  Sometimes you may have no alternative but to fight back.  But I agree it is critical to continue growing the business). 

• Be prepared for anything. Pushed to the edge, some people will fight back with extreme measures. Although secretly passing legislation is extreme, be prepared for the unexpected.

(Comment:  I have learned this lesson the hard way myself with business partners in a few of my endeavors.  Do everything you can to protect yourself.  Start by knowing your rights and make sure to document, document, document.  Adversity often brings out the worst in people but amazingly people also change with substantial success.  Researchers have found the mere presence of money changes people.  It is also a good idea to have a trusted confidant that can help you vet a potential partnership without emotion).

• Sell on your way up. Entrepreneurs are "hard-wired" to grow businesses. The idea of selling is usually a far-away concept that is considered, but knowing the best time to sell is not intuitive. Don't wait until you can see the peak because chances are your buyers can see it too and will discount the price accordingly. Plan on a full year for the sale process to be completed; if you pull the trigger too late, you may miss.

(Comment:  This is a tough one for most business people.  You need to have a little luck on your side to sell at the right time.  But it's just like investing in the stock market.  You will likely never sell at the peak so don't be greedy.  A business sale should be a win-win for the buyer and seller). 

Overall, I just can't stress enough the importance of carefully considering whether a business partnership is right for you.  I often joke that it is not a matter of "if" but a matter of "when" the partnership will end.  But this is one joke I don't consider to be a laughing matter.  Fox's tale proves it.   

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Today is my last day with the Sullivan & Ward law firm.  This coming Monday I am taking a hop, skip and a jump over to the law firm of Brick Gentry, P.C. in West Des Moines, Iowa.  This is actually almost literally true as the Brick Gentry law firm is located across the parking lot just to the west of my current office location. 

It is difficult to leave my friends at the Sullivan & Ward firm but I am excited by this new opportunity.  Brick Gentry is a growing law firm with an excellent reputation in the Des Moines legal community for over 40 years.  The firm now consists of approximately twenty-five lawyers practicing in a wide range of areas including business law, municipal law, health care law, employment law, litigation and real estate.   

I'll join the firm as a shareholder and continue to work with my current business law clients and litigation matters.  Rush on Business will also continue although you will notice some changes to the links and contact information on the blog in the next couple of days. 

My new contact information is:

Rush Nigut, Brick Gentry, P.C., 6701 Westown Parkway, Suite 100, West Des Moines, IA 50266.  Phone:  515-274-1450; Fax:  515-274-1488; email:  rush.nigut@brickgentrylaw.com

Thank you again to all of you that read this blog.  I appreciate your support and look forward to this next step in the journey.  Stay tuned for more because I have a few plans ahead to mix it up and enhance the blog.  I'll need to settled in but I am looking forward to working on some new challenges very soon. 

photo on flickr by phxpma

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Here's some great tips for new small businesses.  Some terrific advice.  The top ten tips as listed:

1. Save up as much money as possible before starting.
2. Start on a shoestring.
3. Protect your personal assets.
4. Understand how--and if--you will make a profit.
5. Make a business plan, no matter how short.
6. Get and keep a competitive edge.
7. Put all agreements in writing.
8. Hire and keep good people.
9. Pay attention to the legal status of your workers.
10. Pay your bills early and your taxes on time. 

I especially appreciate the emphais placed on paying your payroll taxes on time, particularly the portion you withhold from your employees' wages. (See the commentary on No. 10).  It is critically important to understand that a corporation or LLC will not protect you from personal liability in the event these taxes are not paid.  (For an example, see a post from my favorite blogging accountant, Joe Kristan).

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As disclosed in the last post the new amended FTC rule concerning franchise disclosure documents requires franchisors to update their UFOC by no later than July 1, 2008.  After July 1, 2008, franchisors must comply with the new FTC rule only.  Currently, franchisors may comply with either the former rule or the new rule.

Here are some key differences between the former rule and the new rule:

• Use of unaudited financial statements.  Start-up franchisors may phase-in the use of audited financial statements.  In this case the franchisor must clearly and conspicuously disclose that the franchise has not been in business for three or more years and cannot include all required financial statements.  (There may still be requirements to submit audited opening balance sheets in registration states).  Franchisees should make sure to review the financials carefully as always.
• Financial Statements.  The FTC will allow the use of financial statements prepared according to U.S. generally accepted accounting principles ("GAAP").  There must be separate audited financial statements for any parent that "commits to perform post-sale obligations for the franchisor or guarantees the franchisor's obligations" in the disclosure document.
• No Broker Disclosures.  The Amended FTC rule eliminates the broker disclosure requirement.  However, the broker will need to be listed on the Receipt Page because the Receipt Page requires the franchisor to identify all "franchise sellers".
• Litigation.  Franchisors will be required to disclose material franchisor-initiated litigation against its franchisees.  The rule will be more lenient as a franchisor will only have to disclose actions that the franchisor filed during its last fiscal year - not the last 10 years. Further,  a full description of the case will not be necessary.  If a counterclaim is filed against a franchisee the disclosure will need to be treated as any other franchisee-initiated action and the regular, full disclosure will be required.  (Franchisees will need to more fully investigate whether franchisor-initiated litigation occurred whether it is in the disclosure document or not).
• Financial Performance Representations.  The new rule encourages franchisors to provide financial performance representations but it is still voluntary.  Franchisors may provide a more detailed cost and expense analysis which could be helpful for prospective franchisees.  Also, franchisors may provide financial representations based upon a subset that shares the same characteristics. 

There are other differences so be sure to talk with an attorney experienced in franchise matters if you are looking at purchasing a franchise.

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Interested in franchising your business and have an extra 36 minutes? 

You may want to listen to this informative podcast on AllBusiness featuring franchise lawyers Julie Lusthaus and Warren Lewis discuss the pitfalls of the Franchise Disclosure Document (formerly known as the UFOC).

The new amended FTC rule concerning franchise disclosure documents requires franchisors to update their UFOC by no later than July 1, 2008.  After July 1, 2008, franchisors must comply with the new FTC rule only.  Currently, franchisors may comply with either the former rule or the new rule.

Stay tuned for the next post on some of the differences between the new franchise disclosure document and the UFOC.

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Welcome to a RAGBRAI inspired Blawg Review.  What is RAGBRAI?  The Register's Annual Great Bicycle Ride Across Iowa is an annual seven-day ride across the state.  Heading into its 36th year, RAGBRAI is the longest, largest and oldest touring bicycle ride in the world.  It's not a race.  It's an experience.   And since Blawg Review is a carnival, nothing says carnival in an uniquely Iowa way like bicycles, spandex, pork chops, pie, frivolity and 10,000 of your closest friends!

The weather in Iowa is frigid this winter.  As the weekend of this Blawg Review approaches Iowans brace for another heavy snow.  Our friend Charlie Longbrief looks at the floor below his stationary bike and dreams of summer.  A person can stand only so many YMCA spinning classes.  He thinks back to his first RAGBRAI as a twenty year old when law school hadn't yet entered his mind and the biggest celebrity on the ride was Oakland Raiders great and Miller Lite spokeman Ben Davidson.  Now it's nothing to see the likes of lawyer turned politician John Edwards or the bicycling legend himself, Lance Armstrong.  Armstrong may have participated in the famous New York City Marathon but his heart will always belong with RAGBRAI.  Listen for yourself:

Day 1:  Missouri Valley to Harlan  - 58 miles

This year's ride starts in the river town of Missouri Valley.  While performing the traditional dip of his back tire in the Missouri River, Charlie sees Liz Overton of the Iowa Law Blog who warns him that because of the $350,000 settlement in a 2004 RAGBRAI death bicyclers better beware of the new proposed legislation from the Iowa State Association of Counties.

Unfazed Charlie gets on his bike and sets out on his adventure.  But as he rides off he does ask himself whether Mad Kane is right.  Is it wise to travel with friends particularly where tents are involved?

About 15 miles down the road Charlie takes a break and starts getting an earful from New Yorker Eric Turkewitz about how State Farm has been hit with a RICO lawsuit over alleged sham medical exams.  That hasn't been reported elsewhere and Charlie worries whether State Farm might be doing the same thing in Iowa.  Charlie is so interested he and Eric ride the rest of the way to Harlan together.  Although its only the first day Turkewitz remarks that he agrees with Lance Armstrong . . . RAGBRAI is a hell of lot more fun than his beloved New York City Marathon.

As he pulls into Harlan, Charlie finds himself a little short on cash and heads off to find an ATM.  There he sees John Crenshaw who starts telling him about the biggest scams banks are pulling off everyday. Charlie just shakes his head in agreement as he pays the $2.00 charge to get the money out of the ATM.  After a little angel hair pasta its time to hit the sleeping bag.  There is a big week ahead and unfortunately Charlie isn't twenty any longer.

Day 2:  Harlan to Jefferson - 83 miles

The next morning Charlie wakes up bright and early and sets off for Jefferson.  He has some clients that are buying a business nearby and that reminds him he should heed Larry Staton Jr.'s advice to know what you are getting when you buy a trademark from an existing business.

About half way to Jefferson our city boy is a little mesmerized by the miles and miles of corn.  It makes him wonder whether Farmer David will be able to pay that large patent judgment he now owes Monsanto as reported by the Patent Baristas.

In Scranton, just short of Jefferson, Charlie sees a big group of people gathered in a park off the town's main drag.  There he sees Dan Slater of the WSJ Law Blog who explains that all the hoopla is because the M & M boys have turned their attention to the RAGBRAI water slides because the Naked Cowboy drove them outta of Dodge.  The revelers love it and the log jam causes a very slow ride into Jefferson that evening.

Day 3:  Jefferson to Ames - 56 miles

It's a big day for politicians on the way to Ames, home of Iowa State University.  Barack Obama and John McCain are expected to make appearances today.  Hillary Clinton is here too and keeps talking about how the Florida and Michigan delegates must count.  Obama shrugs it off by saying even his six year old knows it wouldn't be fair to count votes where there was no campaign.  But at least Florida has made significant strides in improving its jury system according to Juries.  While Diane Levin points out voters can learn a lot from the field of negotiation.  Eugene Volokh shares that John Mellencamp may be able to stop McCain from playing his songs after all.

All the political talk has people addressing serious issues on the road today.  Riding on a three person tandum, Leon Gettler of Sox First tells Charlie that Sarbanes-Oxley not only failed to stop the subprime meltdown, it contributed by giving investors the false confidence that they could rely on the law, and not prudence to protect their market holdings.  Scott Greenfield shares that Congress has a pending bill that may immunize banks from paying billions in dollars to a small Plano, Texas company.  Patently-O adds that although DataTreasury is not directly mentioned in the bill it is pretty clear that Section 14 is directed primarily at the company. 

As Charlie rides into Ames he sees Kevin O'Keefe and  Holden Oliver of What About Clients engaged in a heated discussion about whether corporate clients really want a lawyer that blogs.  O'Keefe says yes while Oliver says no.  It then gets a little personal when O'Keefe accuses Oliver of being someone else.  Charlie blames Teri Rasmussen who started the whole thing when she said every client should want a lawyer who blawgs.

Day 4:  Ames to Tama-Toledo - 75 miles

Charlie gets ready to head off to Iowa's version of the twin cities today.  In the pancake breakfast line he meets Connie Crosby who is kind enough to introduce him to David Bilinsky.  David tells Charlie all about how there is a great need for law firms to turn their senior partners into business leaders.  David Maister overhears them and chimes in that one-firm firms are often quite successful.

After an uneventful morning Charlie witnesses an accident on today's route where someone goes to the hospital.  It looks like the rider will be okay but David Harlow of HealthBlawg warns that hospital-acquired infections are a real problem.  Iowa estate lawyer Matt Gardner says that even if the rider makes it through he should still think about the disposition of his bodily remains.

 As he enters Tama (or is it Toledo), John Phillips of the Word on Employment Law almost runs smack into a little beagle that darts in front of him.  The incident causes John to conclude that beagles should no longer be excluded from the Animal Employment Protection Act (AEPA).  John is obviously a little excited about the near miss and starts rambling about how he handled the situation a whole lot better than Roger Clemens handled the accusations from Brian McNamee.

Day 5:  Tama-Toledo to North Liberty - 82 miles

Now that we have passed the mid-way point for this year's ride, everyone is a little loosey-goosey today.  Charlie's cadence starts to pick up as the wind blows with the sweet smell of pork chops.  That could only mean that Mr. Pork Chop is nearby.  As he pulls off the roadside to visit our pork chop hero, Charlie sees that Iowa legal blogger extraordinaire Brett Trout and his band of Iowa legal bloggers are engaging Mr. Pork Chop in a battle of wills to determine who has the loudest pork chop call.  Sadly, while Trout may be Iowa's toughest attorney he is no match for Mr. Pork Chop in this arena.  Hear why:

After a pork chop and a short nap Charlie rides along to catch up with Michael Moore who discusses risk management in employee terminations and explains sometimes the "How" is as important as the "Why".  Pretty soon both of them come across a big party along the roadside.  A crowd is gathered around Dennis Kennedy who apparently is still celebrating his blawgiversary and birthday.  During the party Tulane Law Professor Alan Childress wonders aloud whether any Iowa legal counselors had ever been in trouble like the lawyer that got into trouble with his state bar by trying to talk his way out of a ticket for deer hunting.

Still a little full from his banana cream pie, Charlie and his new friend Charles H. Green ride along at an easy pace discussing that as more and more banks and consumers walk away from loans--and contracts gone bad, we are reminded that legally binding contracts are often only as strong as the morality of those signing them.

That evening after dinner there is lots of entertainment in North Liberty.  At a concert Cathy Gellis proclaims, "I need a husband!"  The revelation causes Jon Hyman to explain what happens when office romances go bad.  But Cynthia Shapiro, who received her RAGBRAI pass from George's Employment Blawg, says you might be able to have that office romance if you know a few secrets.  When Jennifer Jaskolka-Brown overhears them she warns them that email has made it much easier to collect damaging evidence in divorce cases.

Day 6:  North Liberty to Tipton - 62 miles

Charlie decides to join the Lance Armstrong peloton this morning for some fun.  As you might expect with Armstrong the ride is a little faster paced today.  There are several others brave enough to join the pack this morning:

• Colin Samuels says he'll never say never when Charlie asks if he'll ride again but Colin sure didn't like it when he got lost on the road from Harlan to Jefferson.
• David Lat explains that the only reason he is on the ride is because his playstation didn't arrive on time.
• Daniel Solove says this is more fun than being interviewed by Money Magazine.
• Barry Barnett offers tips on how to make the ride easier when you are with him.
• Jackie Dowd contemplates what life would be like without a legal system which is maybe a little profound this late in the ride. 
• Carolyn Elefant is usually Solo by Choice but today she is content to ride with the group especially since she thinks Lance is so cute.
• Anne Reed says sometimes its better to walk this way but Charlie can't imagine a walk across Iowa. 

Day 7: Tipton to LeClaire - 55 miles

The last day!  On his ride to LeClaire, Charlie meets up with the anonymous Editor of Blawg Review to tell him the ride has been worth it.  Together they dip their front tires into the Mississippi River where Charlie quips that normally what happens on RAGBRAI stays on RAGRBRAI, but this year what happens on RAGBRAI ends up on Blawg Review!

 * Legal Disclaimer:  This Blawg Review is a work of fiction.  Names, characters, places, events and incidents either are the product of the author's imagination or are used fictitiously.  Any resemblance to actual persons, living or dead, events or locales is entirely coincidental.

Blawg Review has information about next week’s host, and instructions how to get your blawg posts reviewed in upcoming issues.  My dear friend and fellow Iowa legal blogger Brett Trout takes the helm next week.  We wish him well as he tries to best the excellence of his previous effort on Blawg Review #106.

--------------------------

 Flickr Photo Credits:  johnedwards2008, wade, blmurch, MNgilen, IaRuth, wade and artandscience

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Chris Moander of the Wisconsin Business Law and Litigation Blog shares his take on the timeless advice that business people can pay for it now . . . or pay for it later.  Chris points out that many business people sadly lump legal services into the "too costly" or "unnecessary" categories when it comes to starting or running a business.  And while good legal services are not cheap it may actually save you in the long run.  Here are some of the downsides for not seeking professional advice as described by Chris:

• Purchased form documents create a false sense of security as “boilerplate” terms are assumed by the entrepreneurs to be “safe,” which is hardly the case. Owners who are not getting along and decide to split may find themselves mired in extremely expensive litigation over a long period of time, all of which could have been avoided by spending a fraction of the litigation costs on quality document drafting by an attorney.
• Technical faults in any number of license or regulatory filings go unnoticed until the company is audited, a criminal investigation occurs, or some other form of litigation begins. The litigation costs dwarf up-front legal costs due to the belief that preventative legal advice was not necessary or worthwhile.
• Buyers and sellers throw together an amalgam of words, believing that the resulting document reflects a mutual understanding. Eventually, one party feels aggrieved and suddenly the so-called contract is revealed as imprecise and nebulous…and so costly litigation commences.

My favorite blogging CPA, Joe Kristan, also shares similar advice over on IowaBiz.com.  Joe's moral?

When you mess with the ownership of your business, it's a lot cheaper to call a business lawyer and a tax guy before you do the deal; it costs a lot more to repair a deal than to do it right in the first place. 

Focus on doing it right the first time.  You will never regret it.

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Terri Rasmussen of the Ohio Practical Business Law Counsel blog says that every client should want a lawyer that blogs.  As you might guess, I agree. 

Why is it important, you ask?  Terri shares her thoughts (with some comments by me):

1. Knowledgeable Entrepreneur.  The blogging lawyer thinks in broader terms about what they want to know and what they can offer to clients.
2. Communication 101.  Connecting in a simple, straight-forward manner is key.
3. Authenticy and Real Voice.  You get to see the personality of the lawyer. 
4. Quality and Competence.  There is some ability to assess the quality and competence of the lawyer you are thinking about hiring.  No way to do that with a yellow pages ad.  This is where Terri makes perhaps her best point.  Any lawyer that is willing to put themselves out there and open up to scrutiny ought to be high on the list of any client.
5. Commitment to the Law Made Practical.  Most clients want to deal with a lawyer that just isn't in it for the money.  Why not consider a blogging lawyer that not only spends their spares time writing but also GIVES AWAY practical information to help people?  Blogging lawyers care.

Like Terri, I strive to have fun and help people through my blog and there is no question it has made me a much more effective lawyer.  Blogging is an educational process.  Not just for the reader but especially for the writer.  Without blogging I would never get to learn from great lawyers like Terri.

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It's always nice when people say great things about you but I am particularly humbled by a recent post from What About Clients?  WAC? is one of the great blogs (and I do mean great as evidenced by their award as the Best All Business Blog for 2007 by the ABA).  I respect Dan Hull and his gang for their absolute passion to delivering superior customer service.  WAC? is really just an extension of that passion.  As a young lawyer it was drilled into me that you do whatever it takes to serve clients and even a little bit more.  It's apparent Dan Hull lives that motto every day - 24/7.

But now there is a little pressure for the Blawg Review on February 18th.  Between WAC? and the comments from the wildly popular Iowa patent attorney Brett Trout I better not disappoint.

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Did you know that women are starting businesses at twice the rate of men? 

Check out this interesting video from the Forbes.com Network featuring an unique program from Count Me In for Women's Economic Independence, a provider of micro loans and education for women entrepreneurs.   The non-profit organization's goal is to inspire one million women to reach $1 million in revenues by 2010. 

For more information be sure to visit the Make Mine a Million Web site.  It's a great concept that Iowa's women business owners should investigate more closely to see what opportunities are available. 

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 I often tell clients it is important to establish relationships with at least four individuals when they start a business:

• Lawyer
• Accountant
• Banker
• Insurance Agent

But in order to have a starting five we need to add a fifth professional.  Who would I add?  How about a marketer? 

But the real reason I wrote this post was so I could shamelessly plug the best team in Iowa.  The Drake Bulldogs basketball team has now moved to 19-1 with a hard fought win over Creighton last night.  The 16th-ranked Bulldogs are clutch this year and have found ways to win at the end of the close games.  Excellent free throw shooting never hurts and last night was no different.  It was a great crowd and great fun.  If you get a chance be sure to catch a game this magical season.

It's been a long time Drake fans had this much to cheer about.  Go Bulldogs!

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Under a new Iowa immigration bill, employers that repeatedly employ illegal aliens would face civil penalties of up to $10,000 and up to a year in jail under legislation being proposed in the legislature.  Employers would be exempt from penalties if they seek verification of a worker's citizenship status through the Department of Homeland Security's verification system.  But many employers complain that system is dreadfully slow.

House File 2026 has sparked significant debate.  Democrats claim it is a human rights issue.  Republicans claim it is pure politics in an election year and intended to protect unions while harming non-unionized independent contractors.   The Hispanic community in particular has great fears that jobs will no longer be available in Iowa under the new law.

This bill may have the biggest impact on Iowa businesses this legislative season.  Read  House File 2026 here.

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Employee lawsuits are continually on the rise.  So how do you keep your employees happy and stay out of court?

While it is technically not a "legal requirement" I have long suggested that treating employees with respect is the best way to avoid employee lawsuits.  Building on this thought I recently saw a couple of excellent posts from employment lawyers John Phillips and Jon Hyman concerning fairness as the Golden Rule of Employee Relations.

Treating others as you want to be treated is a concept that even young children understand.  But while the concept is easily understandable employers still have a difficult time being fair.  To this end, Phillips offers five areas of fairness where employers should concentrate their efforts:

1. Appearance: does an employment action appear fair to an outside observer?
2. Counseling: except in the most egregious of cases, was the employee told of a deficiency and given a chance to correct it?
3. Consistency: are similar disciplinary problems handled similarly and to the same degree?
4. Documentation: can you point to a performance review, written warning, a note in a personnel file, or some other contemporaneous piece of paper that supports the personnel decision?
5. Rationale: was the employee given a reason for the decision, and was it the real reason?

As Hyman points out, juries are big on fairness.  It is critical to remember that in a jury trial your jurors are likely to be employees rather than employers.  Being fair will not only reduce the employment claims against you but increase your chances of success if you are sued.

So next time you deal with an employee disciplinary situation be sure to remember the Golden Rule of Employee Relations.  It will make a difference.

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The Iowa Farm Bureau is sponsoring a business development seminar on February 7, 2008 at the Iowa Farm Bureau Auditorium in West Des Moines, Iowa.  (I didn't see a start time on the Web site but for further information you should contact 1-800-254-9670).

The Renew Rural Iowa is an Iowa Farm Bureau program that combines an innovative mentoring model for entrepreneurs with a rural vitality investment fund.  The program is designed to enhance the enterprise value of existing or new small town businesses to encourage their reinvestment within the community, thereby increasing the overall wealth of that community.  The program combines the relationships, network and resources of IFBF with the business mentoring muscle of Cedar Rapids-based Entrepreneurial Development Center, Inc. (EDC).

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Today I'll be pinch hitting for Brett Trout at the Des Moines Partnership's Biz Networking Luncheon.  I will cover how to stop doing things online that will land you into court.  The best part of this presentation is I get Brett's material.  I hope to see you there today.

This event will be held in the Arthur Davis room at the Greater Des Moines Partnership on January 15th. The luncheon will begin at noon and will conclude at 1:30. The cost of the event is $10 for members and $12 for non-members.  To RSVP for the event, please email Cathy Spenceri at caspenceri@dmacc.edu . We hope to see you there!

photo on flickr by jimcchou

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This Wednesday morning (Jan. 16th) I will speak at the IowaBiz breakfast series on the How To Avoid Legal Surprises for Your Company.  The presentation begins at 7:30 a.m. at the Professional Solutions Insurance Services' Building, 14001 University Avenue, Clive, Iowa.

Thanks to our hosts from Professional Solutions Insurance Services.  So far, the series has been fantastic including talks from Drew McLellan, Shirley Poertner, Brian Honnold and Mitch Matthews.

I hope to see you there.

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If you are looking at a franchise opportunity perhaps you should beware if your prospective franchisor says the following:

1. You don't need a lawyer to review the agreement. 
2. I would prefer you don't talk with the other franchisees.  You should only talk with me.
3. We won't negotiate any terms.
4. Trust us, we can't (and won't) change the agreement but we won't really hold you to that provision anyway.

Like many people you may be considering an investment of your retirement savings in a franchise.  You owe it to yourself to do the best job possible investigating that franchise and performing the most due diligence possible.  That includes hiring franchisee counsel to review the franchise agreement and disclosure document and talking with as many franchisees as possible.  Some franchisors won't negotiate but many will consider your needs.  And never, I mean NEVER, believe the franchisor that tells you they won't hold you to the terms of their written agreement.  You can be assured that the franchisor's lawyer in any lawsuit will never acknowledge that statement was ever made and most franchise agreements are written so that any such statement could not be used as evidence anyway.

Trust your gut.  Don't believe the hype.  Be willing to walk.

photo on flickr by Picture Perfect Pose.

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Is your business in need of a buy-sell agreement?  Don't know how to get started? 

An excellent resource worth considering is a book from Z. Christopher Mercer called Buy-Sell Agreements:  Ticking Time Bombs or Reasonable Solutions?   A blog post from Mercer worth reading also raises an excellent point regarding buy-sell agreements:

If you are in the process of creating a buy-sell agreement, be sure that the document actually reflects the agreement of the parties to the critical business and valuation issues that relate to the particular situation.  If you have an existing buy sell agreement, review it to insure that it reflects agreement of the parties on key business and valuation issues that currently pertain to your situation (and not to the situation fifteen years ago when you first signed it!).  In both cases, be sure through review by competent legal counsel, that the agreement appropriately considers legal issues that pertain to your situation.

Seems like common sense but I recently learned of a situation where two owners had drafted their own agreement. (Kudos for at least recognizing the need for it).  The owners agreed upon a valuation.  The problem that arose is that neither owner really understood the valuation they had agreed upon and as their business progressed the valuation did not reflect the realities of their business.  The failure to review and implement an agreement with competent counsel has now resulted in litigation. 

It's also wise to get advice from an accountant or other business valuation expert when creating the buy-sell agreement.  A team approach is often very helpful.

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The Iowa Caucus is approaching quickly.  If you attend campaign rallies for the candidates or listen to TV ads you will almost never hear anything about small business. 

But in reality, America's small businesses are the driver of our economy.  Consider these facts from the Small Business Administration (SBA) as outlined in February 2006:

10. Small businesses make up 99.7 percent of all United States employers.

9. Small businesses create more than 50 percent of the American nonfarm private gross domestic product (GDP).

8. Small patenting firms produce 13 to 14 times more patents per employee than large patenting firms.

7. The more than 24 million small businesses in the United States are located in every community and neighborhood.

6. Small businesses employ 50.1 percent of the United States’s non-farm private sector workers.

5. Home-based businesses account for 53 percent of all small businesses.

4. Small businesses are 97 percent of America’s exporters and produce 26 percent of all export value.

3. United States saw an estimated 580,865 new small firms with employees start-up in the last year measured.

2. There are approximately 4,115,900 minority-owned businesses and 6,492,795 women-owned businesses in the United States, and almost all of them are small businesses.

1. The latest figures show that small business creates 65 percent or more of America’s net new jobs.

I encourage you to find out where the candidates stand on America's small business issues.  It's an issue vital to our economy.  You are unlikely to find an express position regarding small business on any of the major candidates' Web sites, so you will need to ask them.  Seriously, can anyone tell me where their candidates stands on SPECIFIC small business issues? 

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With 2008 fast approaching perhaps you are considering the pursuit of the American Dream to own your own business.  But where do you start?  Here are some helpful legal tips to consider before you start your Iowa business:

1. Find out the availability of your proposed business name. You can do a quick search on the Iowa Secretary of State Web site to see whether your name is available. If the name is available you may want to reserve the name through the Secretary of State but you are not required to do so before forming your business entity. You may also want to consider whether any company outside Iowa has your business name. You can conduct a free search on the U.S. Patent and Trademark Office or use a paid service to research trademarks nationwide. It is also a good idea to check whether someone has your proposed Internet domain name.  An intellectual property attorney could also be very helpful in this process.

2. Pick a Place to Incorporate or Form a Limited Liability Company (LLC). I am sometimes asked whether an Iowa company should incorporate or form an LLC in another state such as Delaware or Nevada. In general, an Iowa small business is probably better off incorporating or forming an LLC here in Iowa. The filing fees are low and the ongoing fees for registering the business in Iowa are among the lowest in the country. (Only $30.00 every two years if you file your biennial report online).

3. Choose the Shareholders and Directors. If you are forming a corporation who will be the shareholders in the company?  If it's an LLC, who are the members? These are the owners of the company.  Determine how much capital you will need. Do you have enough capital or access to capital in order to start the business on your own? If not you may need to consider other investors.

In most cases the shareholders of the small business are also the directors. Do you want outside directors? There may be good reasons to have outside directors but think this over carefully before you elect to do so.  Electing outside directors may limit your control over the business.

3. Create your Articles of Incorporation or Organization. The articles of incorporation (corp) or organization (LLC) act as a charter to start your new business in Iowa. The filing fee with the Secretary of State is currently $50.00. It is generally a good idea to have an Iowa business lawyer prepare your Articles of Incorporation or Organization and other corporate documents.

4. Prepare corporate bylaws or operating agreement. The bylaws (corp) or operating agreement (LLC) set out the operating standards and procedures the business company will follow.

5.Create meeting minutes, resolutions and agreements. It is a good idea to document the initial meeting minutes of the company including the meetings of the shareholders and directors or the members. At this time, you will elect the officers of the company including the president, vice-president, secretary and treasurer. You will also issue stock (corp) or membership (LLC) certificates at this stage. If you have multiple shareholders or members you will also likely need a buy-sell agreement.

6. Obtain your employer identification number (EIN). Your corporation or LLC will need to obtain an employer identification number from the IRS. This can be done through a convenient online application process.

7. Elect your tax status.  There are several different options for how your corporation or LLC could be taxed.  Make sure to talk with both your accountant and lawyer about which form of business entity is the most advantageous for your situation.

8. Open a bank account. You will typically need the EIN and a banking resolution in order to do this.

9. Obtain any licenses and permits. You will need to check the federal, state and local regulations to determine whether you need and licenses or permits to operate your business.

10. Follow the corporate formalties of running a business. In Iowa, this includes registering your business every two years with the Secretary of State's office. You also need to do corporate minutes at least on an annual basis including the election of officers and directors. Sign all documentation using your title as a corporate officer. You will also want to minimize or avoid situations where limited liability is not an absolute.

For more information on setting up an Iowa corporation or LLC please visit my small business formation page. 

photo on flickr by MargaretFun.

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Abe Lincoln, Freedom Fighter (1978)
Abe: I don't know about this politician business.
Judge: What do you mean by that?
Abe: If I have to sacrifice my integrity for politics, I guess I'll just have to stay a lawyer! 

Up to this point I have avoided blogging on politics and the Iowa caucus.  It's a no win situation for me.  I have clients on both sides of the aisle and a policy not to debate politics with clients has served me well.    Besides, Iowa lawyers like Gordon Fischer and Ted Sporer do a tremendous job of covering politics with their blogs so I'll leave the debate to the experts.

But one campaign strategy surprised me.  Many of the candidates are lawyers.  But as Joe Kristan recently pointed out, lawyers are not exactly the apple of the public's eye.  It's probably part of the reason why lawyer candidates tend to rarely emphasize their legal careers.  But one candidate has decided to go against the grain.  Trial lawyer extraordinaire John Edwards is campaigning in Iowa today with his most famous client.

As detailed in his book, Four Trials, Edwards obtained a $25 million judgment on behalf of Valerie Lakey and her parents.  Valerie nearly lost her life when she was disemboweled by a swimming pool drain that was incorrectly attached.  He has sent out mailings featuring the Lakeys and is now campaigning with them.  He also unabashedly points to his career as a trial lawyer as an example of how he will stand up and fight against corporate and special interests.    It's a bold but risky move given the public opinion of trial lawyers in particular.  But I am proud of Edwards for not shying away from his tremendous career as a lawyer. 

While the image of lawyers could be improved, it should start with lawyers being proud of the profession they have chosen.  We offer society a valuable and important service.  My thanks goes to lawyers like Edwards who aren't afraid to talk about it.   

Photo on flickr by alexdecarvalho  

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There is a nice article in the Business Record by Amanda Ripp this week about the Central Iowa Blogga Nostra gaining momentum and growing in popularity.  I am continually impressed with the quality of individuals and business people who are blogging in Central Iowa.  The article features several quotes from members of the Blogga Nostra extolling the benefits of business blogging: 

Mike Sansone (Blogging and social media coach): "The reach (of blogging) extends beyond borders; it brings money and business into Iowa."   "In the old days, it took a phone book and a chamber of commerce to extend your business to another city," Sansone said. Blogga Nostra members are extending their businesses through more high-tech means with their blogs.

Angela Maiers (Independent education consultant):  "I have seen a difference, not just with blogging, but being on the Web," Maiers said. "It has helped me to build connections with businesses and other educators, and helped me to prepare students for the 21st century. There are powerful people with powerful ideas outside of the classroom and I have made those connections through blogging."

Timothy Johnson (Chief Accomplishment Officer of Carpe Factum and professor at Drake University):  Timothy met his favorite author, Steve Faber, through blogging.  "A couple of months after I began blogging, I got an e-mail from Steve, out of the blue, complimenting me on my writing," Johnson said. After making the connection, Faber spoke to one of Johnson's classes.

Mike Wagner (branding consultant):  "When there are possible business opportunities, you are able to sustain those relationships," Wagner said. "You have a shot to do business with people. Typically you hand a business card to someone and they throw it away. Give them a brochure, maybe they read it and then they throw it away. With blogging you can keep up the conversation. You keep business growing and react to consumers through an interactive piece."

Brett Trout (Iowa patent and intellectual property attorney):  If a blog is linked to a more popular or higher-traffic blog, it will be easier for search engines to find the site, increasing the blogger's popularity, Trout said, "This is huge to Google."

Andy Brudtkuhl (Web developer with Simplifive):  "The diversity of the group makes for different readership; it allows us to cross audiences," said Brudtkuhl,

and even this Iowa business attorney:  "You link out to other people, or mention them on a post; it is a reciprocal effect," . "They write about you, and then someone else writes about that [post].  That's how it grows."  "The cost is minimal, Bloggers can spend anywhere from nothing to a couple hundred dollars per month. Web sites can cost thousands of dollars to maintain."

So what are you waiting for?  Join us at the Panera U in West Des Moines the first Friday of every month.  It's a great opportunity to meet new friends and gain business contacts.

P.S. Thanks to fellow Central Iowa Blogger, Doug Mitchell, for lunch today.  Doug is a perfect example of someone that has gained contacts through the Central Iowa blogging community and is now using those contacts to build a business.

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Iowa has never been the hot bed for franchisors but it seems as though some Iowa franchisors are really picking up steam.  According to the Des Moines Register this morning Chocolaterie Stam stores have expanded to Ames, Chapel Hill N.C., and Wauwatosa, Wisconsin.  Upcoming stores including Minneapolis and Steamboat Springs (that would be my personal favorite) and also is contemplating stores in Kansas City or West Des Moines.

Another expanding local franchise is Maid-Rite.  It is my understanding Maid-Rite is growing rapidly with plans to head into Florida and Texas and with the new store design it's easy to see why.  This definitely is not your father's Maid-Rite.

But if you are considering these franchises be sure to conduct your due diligence and consider the fundamentals for franchisees in your negotiations.  Don't fall in love with the deal.  (I know it's tough with chocolate but control yourself). 

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Looking back on the first year of work at the Business Innovation Zone (BIZ), I have met with over 60 potential clients ranging across a wide variety of business areas.  I have learned much on this path. First and foremost, I have learned to never prejudge an idea. I must say that some of the most "unique" sounding ideas described in an initial phone call or meeting have turned out to have the most merit. The entrepreneurs in this area have a tremendous amount of creativity and several have identified truly unique market niches that have not been exploited to date. Along with those great ideas, I have met with many whose ideas I found lacking. Asking hard questions has become a well worn path for me. In many cases the idea has not been thought through from a business perspective. The euphoria of the "perfect product" has overshadowed the realities of a profitable venture. I often find myself asking potential clients questions about the running of their prospective business. For many, it is a rude awakening as they come to understand the immense hardship and stress that will come with starting a venture.

I am often asked what advice I have for would-be or current entrepreneurs. Here are my thoughts for those starting out:

• Seek out many opinions on your idea. Do not just "go with your gut".
• Spend time up front on a business plan, but only to the point that you frame your path and plan. Business plans evolve rapidly when you are forming a business, rarely surviving the first customer engagement.
• Know your exit points. It is easy to look out and say "I will sell my business for $xxx,xxx,xxx". It is much harder to say, "I am only going to invest $xxx,xxx" or a certain amount of time. Treat your venture as an investment and know when to exit as the event arrives.
• Take a balanced approach to your idea and business. Do not ignore important areas for lack of knowledge or assume that "I will figure it out when I get there".
• Relationships matter. No matter how automated or high tech things get, the relationships you build will support your company and conversely the lack of relationships will guarantee its failure.
• Learn to sell. Selling is ABSOLUTELY CRITICAL to your initial success. Hiring a salesperson is not the answer in the initial phases of a startup. You the entrepreneur must be prepared to get out and sell your idea, your product, your service, and yourself.
• Finally, spend a substantial amount of time understanding the cash flow of your business. For most businesses, the lack of cash flow management is the single greatest failure point.

From Rush:  BIZ is a community sponsored non-profit business accelerator designed to provide economic growth in Central Iowa through the development and expansion of entrepreneurial enterprise.  Particularly if you have a business in Central Iowa that is poised to grow regionally, nationally or globally, I encourage you to contact Mike. 

photo on flickr by aloshbennett

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I have seen many articles on the Internet which state that you absolutely need to form a limited liability company (LLC) if you are a small business owner.  The S corporation, once the darling of small business entities, must now feel like the red-headed step child.

But as New York attorney Derek Underwood points out LLCs are not always a good fit for the small business owner.  You may be able to save on self-employment taxes by using an S corp instead of an LLC.  But as Iowa accountant Joe Kristan cautions you need to be careful when you set your "reasonable" salary.  Joe says the issue is given greater scrutiny by IRS auditors these days.  It's important to get advice from an accountant and/or business attorney on the issue when you make the decision about which business entity to choose.

Please note:  In Derek's post he mentions that an S corporation is usually less expensive to form than an LLC.  In New York the filing fees for an LLC are considerably more than an S corp.  However, in Iowa the filing fee for LLCs and S corps is currently $50.00.

photo on flickr by digitalclickclick

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Thought I would share this article from Seeds of Growth following up on Mark Cuban's talk at Blogworld. 

Remember:  In business, you only need to be right once to be a success.

Did you know that a certain Central Iowa patent attorney also appeared at Blogworld?  Quite a feather in Brett's cap.

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I ran across this informative article on whether you should hire a franchise broker to purchase a franchise via the Indiana Civil & Business Lawyer Blog. 

The article discusses how the Internet has changed the way people find a franchise.  With all the information available on the Internet it has produced "information overload" for prospective franchisees.  The Internet has paved the way for trusted intermediaries to sort through the morass.

The controversy is whether franchise brokers are trusted intermediaries.  As mentioned in the article it is important to remember that the franchise broker is not necessarily independent.  The brokers are paid a fee typically only if the sale is successful and brokers themselves usually do not represent all franchise opportunities.  Varying fees among franchises may encourage a broker to steer a prospective franchisee to one opportunity over another.

Other the other hand, I have had the good fortune to work with franchise brokers like Joe Cooney who are professionals and attempt to give objective information to prospective franchisees.  Professional franchise brokers will encourage you to conduct appropriate due diligence.  Professional franchise brokers will put your interests above their own.  Their long-term livelihood depends on that.  Not the one time sale. 

But nonetheless do your homework just like you would for any professional whether it be a business lawyer, accountant, real estate agent, financial representative, business broker, etc. 

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It took us awhile but Sullivan & Ward's Iowa Law Blog is now live.  It was designed with the able assistance of LexBlog.  (The same company that designed and maintains this blog).

While Rush on Business tends to focus only on issues impacting Iowa businesses, we are taking a broader approach with the Iowa Law Blog to cover many different aspects of Iowa law.  I know many believe that a law blog (or any blog for that matter) should cover a niche topic.  However, I believe that a broader blog is better than no blog and it is frankly tough for a law firm of our size to have eight different niche blogs.  Besides the New Jersey Law Blog is a prime example of how a state law blog can achieve remarkable blogging success.

The Iowa Law Blog will focus on several legal areas including:

• Utility law (the core of the law firm's work for over 70 years);
• Business Law;
• Trust and Estates;
• Trial and Mediation;
• Employment Law;
• Regulatory Compliance;
• Family Law; and
• Real Estate

Similar to what Stark and Stark has done in New Jersey, we hope to keep businesses and individuals updated on legal and legislative developments in the Hawkeye State.  (Yes, you read that correctly despite the lack of wins and no offense).

We hope you find valuable information on the Iowa Law Blog and look forward to your comments.

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Where should you incorporate your Iowa small business?  This question is asked a lot by many prospective small business owners.  The question used to be surprising but after seeing and hearing numerous advertisements for Delaware and Nevada corporations on the Internet and on satellite radio it is definitely a legitimate question.

Delaware has reputation and history on its side.  Delaware's Division of Corporations boasts that more than a half a million business entities make their legal home in Delaware including more than 50% of all U.S. publicly-traded companies and 60% of the Fortune 500.  Businesses, especially large ones, choose Delaware because of the state's business laws and respected Court of Chancery.  Most observers say it is because of Delaware's predictability. 

Nevada has recently exploded in popularity for many businesses.  This is due to Nevada's pro-business climate, low-tax mentality and the lack of an information sharing agreement with the IRS.

Delaware or Nevada may offer viable options for some companies but in general most Iowa small businesses are probably wise to incorporate in Iowa.  First, Iowa has very low fees when it comes to incorporating your business.  It is a $50.00 fee to file Articles of Incorporation for a domestic corporation in the state of Iowa.  Further, it only a $30.00 fee every two years for a biennial report if you file online.  These fees are extremely low compared to other states.

Second, you won't avoid Iowa taxes by incorporating your Iowa small business in Nevada or Delaware if you are doing business here in Iowa.  The tax and corporation laws of Iowa will require you to register your company and pay fees as a foreign corporation in Iowa and you will be required to pay Iowa state income taxes for any income earned.  (You also do not avoid federal income taxes by incorporating in Nevada despite the lack of an information sharing agreement with the IRS).

And the perceived court advantages in Delaware?  That might be fine for a large business that is actually going to litigate a case in Delaware but it is probably not cost effective for most Iowa small businesses to litigate their cases in Delaware.  Besides unless you have well-written forum selection clause in contracts your Iowa small business will likely end up in Iowa courts anyway.

If you have questions regarding where you should incoporate your Iowa small business be sure to contact a business attorney licensed in Iowa. 

Photo on flickr by rsgranne.

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If you operate an online business or you are thinking of starting one I recommend you pick up a copy of Cyberlaw:  A Legal Arsenal For your Online Business.  Written by Iowa intellectual property attorney Brett Trout the book is new and updated with lots more content than his previous version. This book still has the helpful sample agreements and policies, but now covers new topics like document retention policies and social networking. Trout also offers easy how-to’s on avoiding legal pitfalls. The rich content and practical advice is bound to save you costly legal fees down the road.

The great thing about this book is that it is actually written for entrepreneurs - not lawyers.  You will appreciate the easy to understand language.  If you call Brett directly you might even be able to pick up an autographed copy from Iowa's toughest attorney. 

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I encourage you to check out Blawg Review #126 written by Anita Campbell of Small Business Trends.  Anita is a lawyer by training but an entrepreneur at heart.  Her award winning Web site was the "Best of the Web" according to Forbes Magazine for small business blogs.

The lineup of small business experts on Anita's site is impressive.  The articles are well-written and informative.  Fellow IowaBiz authors should especially take notice.  The site is something to which we should aspire. 

And thank you to Anita for including my post on whether Licensing is a Viable Option Rather than Franchising?

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I have written about how to hire a business lawyer at times in the past.  My first rule is that the lawyer should be experienced and competent in business law rather than choosing a personal injury, family law, criminal law or other lawyer.  My analogy used to be that you would not want a plastic surgeon operating on your heart.  But I have a new analogy: 

You wouldn't want a linebacker covering a wide receiver on 2nd and 13, right?

No disrespect to Mike Klinkenborg.  The guy played his heart out.

Congratulations to Matt Gardner - the most faithful Iowa State Cyclone fan I know. 

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Congratulations to What's For Dinner - Des Moines and its owners, Dawn Angus and Kristen Severs for their feature article in the Des Moines Business Record.  The success of their meal assembly business has brought multiple inquiries from would be entrepreneurs who are wondering whether they offer franchises opportunities for their business.  The thought of expanding beyond the single store operation had intrigued the owners but the investment of time and money is substantial.  A franchise also opens you up to FTC and state regulations which require disclosure statements such as an offering circular.

The article discusses how Dawn and Kristen were presented an opportunity to offer a license of their recipes, Web site and logo.  In these particular circumstances we were able to craft an agreement which provided them the opportunity to expand their reach beyond the single location but without all the hassles and expense of a franchise. 

So is licensing a viable option for businesses looking to expand rather than franchising in all circumstances?  Absolutely not.  Whether or not licensing is right for you is completely dependent upon the facts and circumstances of your own individual situation.  (See Don't Let Your Distribution or Licensing Agreement Become an Inadvertent Franchise).

Iowa has very specific laws on franchising and other business opportunity promotions.  In order to license your business product here in Iowa you must fall within the exceptions to the franchise and business opportunity promotions.  Particularly if you are offering a business system or marketing plan to a new business it may be difficult to fall within the exceptions to these important regulations. 

In order to determine if licensing is right for you be sure to consult a business and/or franchise lawyer before acting. 

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In the never ending search for objective franchise information  I discovered Blue MauMau.  The site is a franchisee community designed to share insight, comments and stories about buying and running a franchise.

A few of recent blog entries worth reading are:

• 9 Riskiest Franchise Industries;
• Can You Profit as a Franchise Pioneer;
• A Franchisee's Warning About Owning a Business.

If you are considering a franchise it is important to research and conduct due diligence about the franchise system.  The notion that franchised businesses cannot fail is false.  Not everyone is cut out for owning their own business and not everyone is cut out for franchising.  Here are two suggestions if you are considering a franchise:

1. Talk with as many franchisees as possible in your due diligence.  Ask probing questions to get an accurate picture of the franchise and the prospects for success.  You will learn both from the positive and negative comments. 
2. Consider working in the franchise system for six months to a year before purchasing the franchise.  There is no substitute for working in the system before purchasing the franchise.  Don't think you can afford to do this?  Perhaps you should consider whether you can afford NOT to do this.

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Congratulations to Vince Basile of Aerospace Geartech who is featured in an article about the Business Innovation Zone (BIZ) in today's Des Moines Register Business section.

Executive Director Mike Colwell worked with Vince to obtain grants through the Iowa Department of Economic Development and DMACC in order to purchase two manufacturing businesses (one from Ilinois and one from Florida) and move them to Iowa.  Colwell also helped Vince with his business plan and other strategic issues. 

Vince is an example of how persistance pays off.  He would tell you that his search for a business was not easy.  He looked at many different businesses until he found the right one (I guess two) for him.   He is now in a business that fits his skill set and passions.  He is extremely resourceful which will serve him well as he moves forward with his new business venture.

I also cannot say enough about the guidance and expertise of Mike Colwell.  Every time I talk with him I learn something new about business and entrepreneurship.  Central Iowa businesses are extremely lucky to have such a great new resource.  If you are a start-up entrepreneur or a business looking for growth or capital, I highly recommend talking with Mike.  BIZ does not actually make investments in companies but it does help entrepreneurs locate grants and find investors.  BIZ is also able to provide assistance with improving business plans and open up valuable networking opportunities for new entrepreneurs.  The thing I like best is that Mike won't always tell you what you want to hear.  His objectivity and honesty is refreshing. 

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It is possible to form your own corporation without a lawyer's help.  Every day, many entrepreneurs do exactly that by using online incorporation kits.  I have written about such companies in the past.  There is definitely a segment of the market these incorporation companies serve.

The most obvious motivating factor for setting up a corporation on your own is to save fees.  But there is a potential trade-off.  You now subject yourself to the hassles of filing a corporation yourself and the possibility of filing erroneous paperwork.  At least if you hire a lawyer you have someone to blame, right?

But the real question to ask yourself is this:  "Have I considered how it all fits together?"  See this post on incorporating in Iowa for a checklist of steps.

But filing articles of incorporation is only one step in the process.  Have you also considered:

• Is a Corporation the right entity for me?
• Bylaws.
• Shareholder Agreements - Buy/Sell Issues.
• Board of Directors.
• Officers.
• Employees.
• Obtaining an Employer Identification Number (EIN).
• Banking arrangements.
• Issuance of Stock.
• Financing your corporation.
• Insurance.
• Whether or not to elect S corporation status.
• Corporate name protection.
• State government requirements.
• Taxes.
• How to Avoid Lawsuits.
• Following corporate formalities.
• Signing documents as an officer.
• Assigning existing business to the Corporation.
• Leases.
• Intellectual property.

The above list is just a sampling of the issues you may deal with as you start your business.  A good business lawyer should be able to help you with all these issues either by providing you with direct advice or connecting you with someone else (often accountants, bankers and insurance agents) that can help fill in the gaps.  Most business people will tell you that hiring a good lawyer is crucial to your business success.   Plus, you might actually be surprised at the cost of hiring an Iowa lawyer compared to some of the online incorporation companies.  

How do you hire an Iowa business lawyer?  I suggest you follow two rules:

1. The attorney must be experienced and competent with business law issues.  Since you are in business you probably should not hire the local personal injury, family law or other attorney that does not have experience with business law issues.  Choosing a lawyer that is not familar with business law may have serious consequences and may increase the costs because the lawyer may learn on your dime. By analogy, you don't want a plastic surgeon operating on your heart.

2.  Make sure you feel comfortable with the attorney.  Don't make a snap decision based upon hourly rates.  Do you trust the lawyer?  Did you get your call returned right away?  Is the attorney easy to talk with?  Does the attorney care about you and your business?  Does the relationship feel right?  There are many competent and experienced business attorneys in Iowa so make sure to trust your instincts.

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The Business Innovation Zone (BIZ) has its first networking event today.  The event is from 12:00 - 1:30 p.m. in the Arthur Davis conference room at the Greater Des Moines Partnership office at 700 Locust Street in Des Moines.

The featured speaker is Steven Smith, President and CEO of GCommerce.  He will be talking about early stage equity funding for startup business, and what has changed in recent years. Lunch will be provided and there will be plenty of time for networking. The cost for the event is $8 for members, and $12 for non-members.

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From Mike Colwell of Biz I learned about Franchise Interviews which is another resource for those interesting in franchising.  The site has several interviews with successful franchisees, franchisors and franchise experts (including lawyers).

I listened to the interview with leading franchise lawyer Kevin Hein of the Denver office of Snell & Wilmer. ( An interesting interview but the actual interview does not begin until 24 minutes into the 1 hour program).  Hein shared insight on what is necessary for a successful franchise concept.  His four points:

1. Unit economics - How much can individual franchisees make?  Will it generate revenue to cover expenses, pay a reasonable salary and give a return on investment?
2. Reasonable Demand for the Product - sometimes franchises may have unique niche, yet no significant demand.  A franchise must have real interest.
3. An easily replicated system - The more detailed the system the harder it will be to replicate.  Are you able to give the same customer experience no matter the market or region.  
4. Unique marketing proposition - How do you stand out? 

Later in the program Hein struck a chord with me when he warned about franchisees "buying themselves a job".  I have noticed that many franchisees do not carefully consider whether they will receive a return on investment when purchasing a franchise.  Obtaining a return on your investment may be difficult with many franchise concepts - so be sure to analyze potential revenue and conduct your due diligence.

P.S.  Another resource to check out is Seeds of Growth which is where Mike spotted the link to Franchise Interviews.  It features some great posts to help your business grow.

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Upon my return from vacation I ran across a site called The Franchise Pundit.  I have been looking a long time for Web sites that give balanced information on franchises rather than just reciting promotional materials.  The Franchise Pundit appears to be such a site. 

If you are conducting due diligence on a franchise you may want to investigate the site.  In a short time I discovered several articles providing practical information on several franchises.  Be sure to check out the franchisor list to see if there are any articles on your franchise of interest. 

If you know of any other sites that provide fair and balanced information on franchises please let me know.

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I am excited to announce that the Sullivan & Ward law firm will publish its Iowa Law Blog beginning in mid to late August.  The firm's law blog will cover general legal issues inlcuding the following areas of law:

• Utility and electric cooperative law;
• Business law;
• Trusts and estates;
• Family law;
• Real Estate law;
• Trial & mediation; and
• Regulatory compliance.

It will be a group effort by the lawyers at Sullivan & Ward.  Our friends at Lexblog are developing the blog.  Kevin and his staff have been great to work with.  I'll let you know when it hits the blogosphere. 

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Yesterday I had an interesting discussion with one of my buddies.  He is an executive with a Fortune 500 company out-of-state and he was expressing his frustration with lawyers - actually his own lawyers.  He just got off the phone with one of his outside counsel when I called.  After talking with him for less than 30 seconds I could tell the last person he wanted to talk with was another lawyer. 

Although not word for word his frustrations could be summed up in a post from Dan Hull called the 7 Habits of Highly Useless Corporate Lawyers.   This post is right on the mark and should be required reading for every corporate lawyer in America.  The biggest frustration?  No. 3 - Taking a stand.  Nothing seems to frustrate business people more than a lawyer who comes down squarely on both sides of the issue. 

The cure:  try listening to your clients.  You might be surprised what you learn. 

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Let's say you are the owner of a manufacturing company.  You've decided to sell your business and you are presented with a Letter of Intent to buy the business.  It's everything you wanted with respect to the price and the buyer is financial sound. 

You may be excited about the potential sale but a word of caution.  Do not forget to address the environmental issues up front.  In many instances a bank will require the buyer to obtain a Phase I assessment by an environmental consultant.  The cost varies but you are looking at approximately $2,500 for such a report.  If recognized environmental conditions (REC) are present the consultant could recommend a Phase II report.  The Phase II report is usually much more expensive and could easily approximate $10,000 and up.

So who pays for these environmental inspections?  It is a negotiable item that you should address from the outset of your Letter of Intent or business purchase agreement.  The seller must carefully consider the environmental issues.  Some of the things to think about include:

1. Who pays for the environmental inspections/assessments?
2. What happens in the event a Phase II is recommended?  Again, who pays?
3. Have you included a provision that allows you to back out of the sale in event the Phase II is not something you are willing to do?
4. What if there is a likelihood of groundwater contamination?  You may be required to notify the DNR after the Phase II.
5. What steps are necessary for clean up and who will pay for those recommendations?
6. Will you be required to indemnify the buyer?
7.  If you don't take care of the environmental issues with the current sale are you only delaying the inevitable problems in the future?
8. If the buyer walks won't you be required to disclose any recognized environmental conditions to another buyer?

I am not an environmental lawyer but fortunately Mark Landa from our office has been particularly helpful in this area.  Mark's previous experience in working with the Iowa DNR has proven invaluable.  Environmental issues could make or break a deal in certain business sales.  I have had make or break issues come up in the sale of manufacturing companies, gas stations, implement dealerships, and more.  If you are selling a business with potential enviromental hazards carefully consider your options from the outset and reach a preliminary agreement with the buyer before due diligence begins.

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A couple of Central Iowa business updates for your information:

1. SEMEE - The next SEMEE (Society for Entrepreneurial-Minded Executives) meeting is scheduled for July 19, 2007 from 6:00 - 9:00 p.m. at the EMC Insurance Building downtown.  I attended the February meeting and thoroughly enjoyed it.  Last time there were some great presentations by some excellent companies including US Rodeo Supply.  The focus of the organization is finding resources, other than money, that might help these companies grow.  Unfortunately I can't make it this time because of a prior commitment but I highly recommend attending if you are interested in business and live in Central Iowa.  It is a terrific networking and learning opportunity.  Hats off to the Steens of Transition Capital Management for continuing this great program.  There is no charge to attend.  For more information you might want to check out my podcast with Adam Steen.
2. BIZ - The Business Innovation Zone (BIZ) led by Mike Colwell is off to a fast start.  BIZ is a new regional business accelerator through the Greater Des Moines Partnership.  The organization already has many active clients in the first four months and has approximately 10 more ready to join.  A client, Aerospace Geartech, received substantial funding from the Department of Economic Development with the assistance of BIZ in order to start a new Central Iowa business.  For more information you may want to check out this podcast with Mike.  He has a tremendous amount of insight in business and a wealth of experience.

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I am hoping you will provide me with some input.  What do you think are the top legal issues facing small businesses today?

My general sense is that employee/human resource issues rank high.  If you are a small business owner, what keeps you up at night from a legal perspective?  If you are a lawyer or consultant, please add your perspective.

Please comment below.   Don't be shy.  I am hoping to develop some blog posts surrounding this discussion and I would love to hear from you.  If you are not interested in commenting publicly, please feel free to email me at rnigut@sullivan-ward.com.  With your input I should be better able to hone in on the legal issues facing small business owners.

Thanks for reading.  I appreciate it. 

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Over on IowaBiz.com Joe Kristan has an excellent post describing the basic tax treatment of S corporation losses.  Joe says,

Bottom line? The ability to deduct business losses is a good reason for many taxpayers to use S corporations.  If you expect S corporation losses, talk to your tax pro before year-end to make sure you are eligible to deduct them.

I always say that the choice of entity (C Corp. v. S Corp. v. LLC) usually boils down to tax treatment.  Joe's article demonstrates why.  If you are forming a new business you not only need to talk with your business lawyer but also an accountant.

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Joe Kristan, Central Iowa's premier blogging accountant, reminds us in a recent post that LLC and corporation owners are responsible for unpaid payroll taxes.  The most important take from the post:

The moral? Never, ever fail to remit your payroll taxes; if you do, don't expect an LLC, or any other entity for that matter, will fend off the IRS.

Joe also expands on his post in a recent article on IowaBiz.com.  I encourage you to subscribe via RSS to Joe's blog and also IowaBiz.com.  Joe's blog is entertaining and informative.  Who knew an accountant could have such a sense of humor?  IowaBiz.com is particularly interesting because it features 12 business bloggers from several different disciplines including marketing, law, accounting, networking and more. 

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The lawyers at Stark & Stark continue to produce helpful information on their law blog for clients and lawyers alike.  The latest article worth reading is from Stuart Mickleberg the Buy-Sell Agreements in Closely Held Business.  Stuart says a good Buy-Sell Agreement should accomplish at least four important objectives:

1. Providing mechanism for the orderly transfer of the business;
2. Establishing a valuation mechanism which avoids disputes between owners as well as possible disputes with the Internal Revenue Service;
3. Reducing possible disputes between owners, an owner's heirs, and possible unwanted business partners to whom an ownership interest in the company may otherwise be transferred; and
4. Providing financial security to a deceased or disabled owner's family.

As I have indicated in the past, the formation of an Iowa business should include a Buy-Sell Agreement.  Unfortunately it is an agreement that is often neglected by business people because they want to save on initial start-up costs.  As my friend Imke Ratschko says, "Buy-Sell Agreements are like prenuptial agreements for people in business... As with prenuptial agreements, people tend to overlook their importance or simply don't want to deal with the subject; after all, they are in love!"

But the time to enter into a buy-sell agreement is at the beginning of the business relationship when everyone is excited and getting along. It is often very difficult to negotiate a deal when something has gone wrong.  Without a buy-sell agreement, owners may end up in court and the business may suffer.

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Governor Culver recently signed into law a bill providing $4 million in funding for Iowa's Targeted Small Business Program.  To qualify under the program a business must have sales of less than $3 million and be at least 51% owned, operated and managed by women, minorities or persons with disabilities.

If you have a business that may qualify under the program you can receive your certification through the Iowa Department of Inspection and Appeals or the Iowa Department of Transportation.  A qualified recipient will be eligible to receive up to $50,000 for start-up expenses.

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I generally recommend that new business clients visit with their accountant before deciding which type of business entity to form.  Even if I were to make my recommendation it is helpful to get the advice of the professional who will actually being doing the taxes. 

I saw a good post today on some of the potential tax considerations you should consider before you form a C corporation.  It's not a lemon of a post (you'll see why).  Please check out Joe Kristan's post on IowaBiz.com for more information. 

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Most small businesses will enter into a contract or business deal from time to time.  Some agreements may be simple while others may require the skills of a contract or business attorney.  In either case, you will want to feel comfortable that you have negotiated your best deal possible.  The following are five basic suggestions for negotiating the best terms for your next business contract:

1. Set out your goals before you start.  The process of writing down your goals in the negotiation helps you clarify what you intend to do, understand the importance of significant issues, and commit yourself to making it happen.
2. Do your homework.  You should know the law, relevant facts and figures.
3. Decide what you really need and what areas are "throw aways".  Be prepared to trade something to get something important to you. 
4. Build trust and listen to the other party.  A recent post from Brett Rogers sets out the importance of listening.  You learn far more in a negotiation from listening than you do from talking.
5. Manage your emotions.  Resolutions rarely occur when parties lose their temper or become irrational.   

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In my last post on franchising I discussed some available franchise due diligence resources for prospective franchisees.  And while I know due diligence is critical before buying a franchise, I cannot help but remember an email I received from a non-client franchisee in response to a different franchise due diligence post I wrote after the Franchise 500 issue of Entrepreneur hit the news stands:

The most difficult information to obtain and verify is franchisee profitability.  The profitability of the franchisor and the franchisees is not always related.  Sometimes those selling franchises make money while the franchisees do not.  And it is not always due to lack of due diligence on the part of the franchisee.  It may be because of inaccurate information supplied by the seller or franchise support that was promised but never delivered.

The reality is that franchisors are required to make only limited disclosures about profitability and many will make no earnings claims of any type.  The number one reason listed to not buy a franchise according to Nolo is questionable profitability.  So what is a prospective franchisee to do?

Franchise lawyer Richard Solomon of Houston, Texas says you should consider conducting the ulitimate due diligence by going to work for someone in that franchise business for a year.  In buying your franchise you may be asked to make a substantial investment of $150,000 to $1 million.  Solomon believes that even if you made minimum wage for a year you will be much better off than risking your liquidity on an investment you know a lot less about because you were in a hurry. 

Risk is inherent in any business venture.  You are taking a chance and a leap of faith.  But actually working in a franchise business before you buy would allow you to find out whether you want to stake your life savings on the opportunity.  Taking a chance with maximum information is not random chance but a calculated risk - and that could make all the difference.

*I originally wrote this post forthe Iowa business law section of IowaBiz.com.

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Are you interested in a business franchise opportunity?  It seems as though more and more Iowans are choosing franchises as an option rather than starting businesses on their own.  It is extremely to important to conduct due diligence and check out franchisors thoroughly. 

Inc.com has an excellent Guide on Buying a Franchise.  Topics covered include:

• Information to Secure from a Franchisor;
• Franchise Site Evaluation Form;
• 10 Common Mistakes of Prospective Franchisees;

and much more.

You should also check out my podcast with Joe Cooney of Frannet which covers some basics of buying a franchise.  Joe also has a list of questions to ask franchisors.  But remember, when conducting franchise due diligence there is no substitute for digging in and working hard.  Above all, always interview as many franchisees as possible to get a better sense of how the franchisees themselves are performing.   

* I originally wrote this post for IowaBiz.com.

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In October of 2006 I posted about an Iowa Association of Business and Industry survey regarding how Iowa business leaders perceived the legal climate in Iowa.  The survey stated that many business leaders are dissatisfied with Iowa's legal climate and believe it is costing the state jobs because of competition with other states.

That survey seemed to contradict the U.S. Chamber of Commerce survey which said Iowa ranks fourth in the country for judicial fairness.  Iowa has ranked in the top five for each of the last four years. 

So, which is it?  Well, we may have the answer.  Jim Carney, Legislative Counsel for the Iowa State Bar Association, says that Iowa's civil trials are on a downward trend.  In the latest addition of the Iowa Lawyer Carney pointed out that there has been a 17.5 percent reduction over the last five years in civil jury trials relating to tort law.  Moreover, the number of civil jury trials in Iowa continues on a downward trend.  There were a total of 262 civil jury trial in the entire state during 2006.  But even more important Carney says is the fact there has been a 44 percent decline in the total number of jury trials (civil and criminal) from 1994 to 2006.  In 2006, 37 counties in Iowa reported no civil jury trials while 21 counties reported one civil jury trial, 18 counties reported two and 7 counties reported three civil jury trials.  All in all, an astonishing 83 counties reported three or less civil jury trials.

Why the downward trend?  One of the major reasons for the decrease in civil jury trials is the increased use of mediation as an alternative to taking cases to court.  Overall, my experience with business clients leads me to believe that Iowa's judicial system is just as good as any state.  There are always ways to improve our Iowa's business climate but it just doesn't appear the facts support the notion that Iowa's legal system is a problem.   

*This was originally written by me for IowaBiz.com.

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One of the biggest challenges for my clients is hiring and retaining talented employees.  David Maister has an excellent post on hiring talented people.  In his post David expands on the War for Talent is Back by Bob Sutton of Harvard Business Online.

Thanks to Kevin O'Keefe for pointing out the posts.  Kevin runs an ever-expanding law blog development and Internet marketing business called LexBlog.  His blog is definitely one I check out every day.

One of the more interesting takes from these posts is the feeling that superstars are overrated.  I am not sure I necessarily agree.  What is overrated is a superstar that has a hard time working within your company's system.  But what if your superstar gets along with others, isn't too greedy and fits just right in your company's system?  Also, from a start-up perspective having a great business system is necessary but having the "right" people first is the recipe for success.  If you don't have the "right" people can you ever develop the great system?  As Jim Collins says, "First Who, Then What".

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If you are looking for Venture Capital blogs look no further than Applied Disruption's "One Stop List of VC Blogs".

It is a very interesting collection of blogs.  In some cases not quite what I expected. 

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Rush on Business Podcast No. 5 is an interview with Mike Colwell.  Mike is the Executive Director of the Business Innovation Zone of Central Iowa (BIZ).  BIZ is a new regional business accelerator through the Greater Des Moines Partnership.  If you are an entrepreneur in Central Iowa you won't want to miss this podcast.

I encourage you to listen to the podcast to learn how BIZ is uniquely situated to help entrepreneurs in Central Iowa. BIZ will offer low cost mentoring and counseling to businesses of all varieties including advance manufacturing, bio and life sciences and high technology.  Mike's focus is on businesses that may have the potential to grow on a regional or national level.  To achieve this goal Mike will take entrepreneurs through a five-step process:

1. Determining the Strategic Fit and Connecting with the Market.
2. Business Planning.
3. What talent is necessary to start-up and grow?
4. What are the leadership needs?
5. Finding Capital.

Mike also has some very interesting things to say about the Iowa business environment and the qualities that define an entrepreneur. 

If you want to reach Mike Colwell to find out more about BIZ please email him at mcolwell@desmoinesmetro.com or give him a call at 515-286-4915.

Listen to the podcast for free!

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Tomorrow I have a podcast interview with Mike Colwell on my BlogTalkRadio channel page.  Mike is the Executive Director of the Des Moines Partnership's new business accelerator, BIZ.  The live interview is scheduled for 4:00 p.m. and will be also be available in podcast format on this blog.

Hope you will listen.  If you want to call in to ask a question the number is (646) 652-4878.  Mike has some exciting things to share about how BIZ can help build businesses in Des Moines and Central Iowa.

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If you are looking at a franchise opportunity you should read this article from Barry Kurtz on Digging into Franchises:  The Due Diligence Minefield.  His proposed Legal Due Diligence Checklist within the article is a must read. 

The due diligence process is important when buying a franchise (or any business).  Kurtz's article deals more with buying the entire franchise company but the article is helpful even if you are buying a single franchise.  I also have multiple articles addressing due diligence issues when buying a franchise including:

• Do Your Homework When Selecting a Franchise;
• Buying a Franchise:  Questions to Ask Franchisors;
• Considering a Franchise:  Make Sure to Interview Current Franchisees.

Joe Cooney and I have a podcast on Buying a Franchise Basics which also has some helpful hints on franchise due diligence.  Joe has some great insight so I recommend a listen. 

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Thanks to Small Biz Survival blog I saw an excellent article from Entrepreneur.com entitled 75 Secrets to Startup.  A portion of the article discusses whether to form a corporation or not.  It also includes information on where to form your corporation.  Many Web site articles and companies will tout Delaware or Nevada corporations.  But the reality is most small businesses are probably better off incorporating in their own state.

For more information you may want to check out my blog post "Where Should You Incorporate Your Iowa Small Business?"

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Rush on Business Podcast No. 4 is an interview with Joe Cooney of Frannet.  Joe is a franchise coach in the Iowa / Nebraska region.  Joe and I discussed several basics of buying a franchise including:

1. What is the franchising model of business?
2. What different types of franchises are available?
3. What do franchises cost?
4. What options are available for financing?
5. How do you lay the groundwork for success?
6. What to look for in a franchisor?
7. How do you research franchises to find the right one for you?

Joe also provided information on a Web site service (www.fransurvey.com) where prospective franchisees download reports with information on what actual franchisees say about their franchisors.  The site looks helpful but it is still no substitute for contacting franchisees on your own when performing due diligence.  I am sure Joe would agree!

For more information or if you have questions on franchise opportunities available through Frannet, Joe Cooney can be reached at (402) 330-7306.

To listen to the podcast, click below.  (It's free!)

Buying a Franchise Basics - BlogTalkRadio Podcast

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On Friday afternoon, March 2, at 4:30 p.m., I am interviewing Joe Cooney of Frannet on my BlogTalkRadio Host Channel.  You can listen live or catch it later as a podcast available on this blog or BlogTalkRadio.  You can even call the program if you would like to ask a question.  The call-in number is (646) 652-4878.  Generally, we have programs on Saturday mornings but this was the only time Joe was available.  If you are interested in franchising you will want to tune in.  Joe has a lot of great information to share.  If you are unable to tune in but want to ask a question please feel free to leave a comment below and ask your question.  We will do our best to get it answered.

Joe and I will be discussing the basics of buying a franchise including:

1. What is the franchising model of business?
2. What different types of franchises are available?
3. What do franchises cost?
4. What options are available for financing?
5. How do you lay the groundwork for success?
6. What to look for in a franchisor?
7. How do you research franchises to find the right one for you?

I encourage you to check out my other interviews with Adam Steen (financing entrepreneurial endeavors), Matt Ashburn (preparing a business for sale) and Brett Trout (electronic discovery and the new federal rule changes).

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Rush on Business Podcast No. 3 is an interview with Adam Steen of Transition Capital Management of West Des Moines, Iowa.  Transition Capital Management recently started the Society of Entrepreneurial Minded Executives (SEMEE) event in Des Moines.  I attended the last SEMEE event and believe it offers tremendous opportunities for growth companies to network with other business owners and potential investors right here in Iowa.

Listen to the podcast here. (It's free!)  Click on my BlogTalkRadio Host Channel Page.

In this podcast Adam discusses issues such as:

1. The SEMEE event and its value for businesses and investors in Central Iowa;
2. Debt v. Equity Financing;
3. Growing an enterprise business rather than just buying a job;
4. The considerations of venture capitalists when determining whether to invest;
5. How equity investment can work for your business;
6. Tips on how new business owners can start and grow their business;
7. There is more money out there in the Midwest chasing good companies than there are good companies. 

For more information on SEMEE be sure to contact Adam by email (asteen@transcm.com) or by telephone at 515-309-0142. 

Listen to the podcast here. (It's free!)  Click on my BlogTalkRadio Host Channel Page.

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The Greater Des Moines Partnership has started a new business accelerator called BIZ - the Business Innovation Zone.  Michael Colwell, a marketing professional with experience in product development has been selected as the executive director.  BIZ is expected to start up at the end of this month.

The business accelerator has been funded through a grant from the State of Iowa and matching funds from Iowa business development and education groups.

So if you have a new idea for the next great business you might consider giving the Greater Des Moines Partnership a call.  Perhaps Mr. Colwell would even agree to do a Rush on Business Podcast to tell us more about this exciting opportunity for regional business people.

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Rush on Business Podcast No. 2 is an interview with Matthew Ashburn of Sunbelt Business Brokers with offices in Ankeny and Cedar Rapids, Iowa.  Matt is a professional business broker with Sunbelt.  He is 1 of only 2 brokers in Iowa designated by the International Business Brokers Association as a Certified Business Intermediary. 

Listen to this podcast by going directly to my BlogTalkRadio Host Channel Page.  (It's free!).

This podcast covers the importance of preparing your business for an eventual sale.  Matt says the key is not to wait too late.  Matt advises that business owners begin sale preparation at least 2 to 6 years before intending to sell the business.  This podcast covers issues such as:

1. How to prepare the business for sale;
2. Why is it important for an owner to consider personal motivations;
3. What advisors should you talk with;
4. The importance of continuing to run the business even though it is for sale;
5. What aspects should an owner consider from a buyer's point-of-view;
6. Valuation issues;
7. Why you need to disclose the warts of your business.

Listen to this podcast by going directly to my BlogTalkRadio Host Channel Page.  (It's free!).

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Generally, the easiest way  for a buyer to purchase a business is through an Asset Purchase Agreement.  The buyer is not actually purchasing the business itself.  One commentator has described it has buying the seller's merchandise without buying the store.

Buyers tend to favor asset purchases for several reasons.  First, the buyer obtains the seller's assets without assuming the liabilities of the business.  Second, the buyer gets a "stepped up" basis on the assets being acquired which is helpful to the buyer from a tax perspective.  (This is where the buyer's basis for depreciation is the allocated purchase price of the transferred assets).  Sound complicated?  Trust me it is a good thing for the buyer.  Third, the buyer can pick and choose which contracts of the business to assume.  Fourth, a buyer may or may not hire the employees of the seller.

Now a seller may want a stock sale, particularly if the business is a C corporation.  In this case the buyer is purchasing the business entity itself.  If the seller owns a C corporation an asset sale may result in double taxation for the seller.  (Never a good thing).  Under those circumstances the corporation will pay tax on the gains of the assets sold, and then the shareholders will pay capital gains tax when the corporation is liquidated.  But with a stock sale, the seller will only pay the capital gains tax on the sale, generally at a 15% tax rate (at least until 2010).

One point to consider in the negotiation of an asset purchase or stock sale is that the potential tax liability for the seller may be greater than the savings to the buyer.  So a seller may want to consider adjusting the purchase price slightly in order to gain the tax savings from a stock sale.

For more information on this subject check out this helpful article from CCH Business Owner's Toolkit .  If you have questions regarding whether you should make an asset purchase agreement or stock sale please be sure to consult your tax advisor and/or a business attorney.

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If you are selling your business you should not divulge trade secrets and confidential business information without a signed confidentiality agreement.  The theft of trade secrets is an increasingly litigated issue.  In the business sale context this often happens when negotiations break down and the potential buyer decides they can start their own business.  It is important for the confidentiality agreement to include the right to obtain an injunction, damages, and attorneys fees in the event of a breach.

The first step in selling your business is to protect yourself.  I also recommend you contact a business lawyer before you enter into any agreements or provide trade secrets and confidential business information. 

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Believe it or not, as a small business lawyer I have named more than my fair share of businesses for clients.  (Maybe I should add that to the list of incorporation services).  I always kind of laugh when I am asked for my opinion on the subject because I am not a marketing, advertising or branding expert - professionals that may actually get paid for coming up with a business name. It also makes me wonder how often do doctors name babies?

But the truth is business owners should take great care in naming their businesses.  I found this article with 18 insights on naming your small business.   You may also want to check out my past post on how to name your Iowa small business covering some of the legal considerations. 

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I listened to an insightful podcast from Becky McCray of Small Biz Survival called Nothing New.  She also quotes Dr. Samuel Johnson who once said, "People need to be reminded more often than they need to be instructed." 

That is so true when it comes to helping businesses recognize legal issues.  So often what I say on a topic is nothing new, but the reminders don't hurt.  Some examples:

• Seven Ways to Avoid Employee Lawsuits
• Corporate Officers Need to Use Care When Signing Agreements
• The Secret of Negotiation: Care Less, Get More
• Five Ways to Avoid Lawsuits Against Your Business
• Small Business Corporate Governance
• Formation of Iowa Business Should Include Buy-Sell Agreement

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I tell clients they need to establish relationships with at least four professionals when starting a business including:

• Lawyer
• Banker
• Insurance Agent
• Accountant

As tax season kicks into full force many business owners may be considering hiring an accountant to complete their business taxes.  I always get worried when a business person tells me he or she does not have an accountant for their business.  In my view, a good accountant for your business is absolutely essential.

This article from About.com talks about how to hire the right accountant.  One of the best pieces of advice from the article is that you should make sure your accountant works on business tax returns.  Not all accountants specialize in business tax returns.  The article points out that big tax preparation chains such as H & R Block and Jackson Hewitt generally cater toward individuals and you may want to consider going elsewhere for business tax returns.

I wonder if fellow Iowa blogger and accountant, Joe Kristan could weigh in with some sage advice on this topic.

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The core of this Iowa business and corporate law blog consists of six main categories found on the right hand side margin including incorporation and LLC formation, starting a business, franchise law, employment law, business litigation and buying and selling a business.  I attempt to cover many of the basics in each category and also follow a variety of new developments including the recent Iowa consumer class action against Microsoft which is one of the largest cases in Iowa history.

In a recent interview with the Des Moines Register I was asked why I started this blog.  Initially I sought to differentiate myself from other Iowa business lawyers in order to more effectively market my services.  While blogging has worked to accomplish my initial goal, I quickly developed a much higher sense of purpose with this blog.  I want to do my part to improve the public image of lawyers.  My strong sense of purpose is to educate and provide information to business people in a way that helps them identify legal issues and make more informed choices about what legal services they need.  The collaborative process of a law blog (or any blog) can allow this to happen. 

Be sure to let me know if you have any questions about this Iowa business and corporate law blog.    Please feel free to explore and comment.  I hope you find it interesting and informative.

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It is important to consider the local zoning ordinances when choosing a business location.  It may not be a significant problem for businesses with office locations but businesses such as car dealerships (especially used), real estate rental companies, auto body shops and manufacturing facilities could run into problems if you are not familar with local zoning ordinances.  A zoning problem can shut your business down very quickly.

Check out Des Moines Municipal Code Chapter 134 and the city of Des Moines Web site if you have questions about local zoning ordinances in Des Moines.

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A recent study by professor James Chrisman of Mississippi State University shows that Iowa Small Business Development Center (SBDC) clients grow 24% faster than Iowa businesses that have no assistance from the SBDC.

The independent study also shows that the SBDC has a significant impact on Iowa's tax revenues, job creation and retention, and capital acquisition and sales growth.  Chrisman's research indicates tax payers in Iowa are receiving a 4 to 1 return from tax dollars spent on the centers.

If you are starting a business in Iowa you should at least check out what the Small Business Development Centers have to offer.  The centers serve all 99 counties from 13 different locations around the state.

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In December's issue of Inc. Magazine, Norm Brodsky describes a paradox of successful negotiation.  The less interest you have in doing a deal, the more likely you are to get one you'll find difficult to refuse.

Brodsky is considering selling his businesses (records storage, secure document-shredding and delivery).  He turned down an offer from a major corporation because they would not buy the delivery business.  A VC firm then approached Brodsky.  Brodsky explained to the VC partner why they should buy all three of the businesses, set his price and then told the VC partner he would not negotiate.

A short time later the VC partner shot Brodsky an offer several million dollars below the asking price.  Brodsky didn't respond.  The VC firm then inquired about why Brodsky had not responded and Brodsky again informed them he would not negotiate.  He really didn't care if he sold his businesses or not. Low and behold, the VC firm agreed to the price and the deal is in the due diligence phase.

This lesson is applicable in business litigation as well.  If you are willing to walk away empty handed you are often much more likely to get a good deal.  You are probably in the strongest negotiating position when you really don't care if the case settles or not.  However, it is rare in the litigation context that an initial "take it or leave it" approach results in a settlement.  Particularly if you are negotiating with an insurance company there will be an expectation that you engage in a negotiation process with multiple offers going back and forth.  Usually a case will not settle until both parties have the perception that they could do worse if they go to trial.  The parties need to sense the risk.

Still, as Brodsky demonstrates, the "take it or leave it" approach can be very effective under certain circumstances and is a very powerful negotiation technique with the right client and case.  Being a good poker player doesn't hurt either.

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As New York Small Business Law blog says, "Articles on choice of business entity are a dime a dozen."  But I agree this article concerning Choice of Entity from the worldwide law firm of O'Melveney & Myers is an excellent guide. 

The article contains the answers to many of the frequently asked questions concerning using a "C" corporation, an "S" corporation or an LLC/Partnership for business operations.   The article discusses the tax aspects of the various entities.  The tax treatment of your business should be a major factor in determining which business entity you choose.  I also recommend speaking with your accountant before you make a decision on which entity to use.

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The time to hire a business attorney is before you get into legal trouble.  It is much easier and more cost-effective to prevent problems rather than solve them.  Further, if you do get into legal trouble it will be much easier to deal with the issues if you already have a solid relationship with a business attorney.

So how do you hire a business attorney for your Iowa business?  I suggest you insist upon two main criteria:

1. The attorney must be experienced and competent with business law issues.  Since you are in business you probably should not hire the local personal injury, family law or other attorney that does not have experience with business law issues.  Choosing a lawyer that is not familar with business law may have serious consequences and may increase the costs because the lawyer may learn on your dime. By analogy, you don't want a plastic surgeon operating on your heart.

2.  Make sure you feel comfortable with the attorney.  Don't make a snap decision based upon hourly rates.  Do you trust the lawyer?  Did you get your call returned right away?  Is the attorney easy to talk with?  Does the attorney care about you and your business?  Does the relationship feel right?  There are many competent and experienced business attorneys in Iowa so make sure to trust your instincts.

Here are a couple of articles which may help you choose the right attorney for your business:

How to Hire an Attorney from Entrepreneur.com

Ten Questions to Ask Your Business Attorney from Allbusiness.com

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I read this well-written blog post from Ken Adams of Adams Drafting regarding the implications of a buyer knowing, pre-closing, that a seller's representations are inaccurate in a business sale.  I recently wrote about the litigation traps of selling a business so I found this article intriguing.

Following the tips outlined in Ken's post may help protect against some of the post-closing demands from buyers in a business sale but it is still important for a seller to document the disclosure of adverse material facts.

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Buying a franchise does not automatically provide you with limited liability.  The franchisor may be a corporation or LLC but that does not make your own franchise business a corporation or LLC.  You must still form your own corporation or LLC in order to obtain the benefits of limited liability.  Otherwise, you will have a sole proprietorship or partnership which could subject you to personal liability.

It is a good idea to sign the franchise agreement in the name of your corporation or LLC even if you must personally guarantee the obligations of the agreement.  It could actually help you in unrelated litigation down the road.  In a case I am familar with the owner of a franchise did not sign the franchise agreement in the name of the LLC he allegedly used for his franchise business.  The plaintiff in that case attempted to impose personal liability on the owner because he had not signed the franchise agreement in the name of his LLC.  Further, the LLC owner did not sign his agreement with the Plaintiff in the name of his LLC.  The defendant used only the franchise name which did not give any indication to the Plaintiff that it was dealing with anything but a sole proprietorship.  Ultimately the court ruled in favor of the Plaintiff and personal liability for the debt was imposed. 

The lesson is to start with the corporate formalities from the beginning.  Be sure to sign agreements in the name of the corporate entity.  Here are some checklists for those interested in forming a corporation or LLC for their franchise or other business.  If you have any questions please be sure to talk to an experienced business attorney.

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Most people have heard of "buyer beware" but anyone selling their business would be wise to think "seller beware".  When someone decides to sell their business they naturally want to find a buyer as quickly as possible for the highest possible price.  But business owners and advisors should take care to avoid litigation traps in selling a business.

1.  Conduct due diligence on the buyer.  Is the buyer adequately financed?  Even if the buyer is able to obtain a loan will the buyer have sufficient operating capital to run the business?  Moreover, does the buyer have an aptitude for the business?  If not, the buyer is less likely to succeed and an unhappy buyer is more likely to file a lawsuit.

Check out the buyer's litigation history, judgments and credit history.  A buyer will almost always obtain tax returns from a seller but a seller should also consider obtaining financial information from the buyer.

2. Do not divulge trade secrets and confidential business information without a signed confidentiality agreement.  The theft of trade secrets is an increasingly litigated issue.  In the business sale context this often happens when negotiations break down and the potential buyer decides they can start their own business.  It is important for the confidentiality agreement to include the right to obtain an injunction, damages and attorneys fees in the event of a breach.

3.  Avoid signing ambiguous letters of intent.  Some letters of intent are binding and others are not.  Be sure to have counsel review any letter of intent to make sure it protects your interests.

4.  Do not make inaccurate representations and warranties.  Sellers often do not carefully consider the representations and warranties they make in the purchase agreement.  There are significant risks in making false or negligent representations and warranties.

5.  Failure to adequately document the disclosure of adverse material facts.  Often a seller will divulge to the buyer adverse material facts that impact the business.  After doing so the deal closes despite the bad news.  Imagine the frustration then when the buyer sues the seller for breach of warranties and representations, fraud and breach of contract claiming that the seller never told the buyer about the problems.  At a minimum, a seller should have the buyer acknowledge receipt of the adverse material facts during the due diligence phase.  By doing so the seller can protect against claims down the road that the buyer was never told about problems with the business.

6.  Do not draft your own purchase agreement or rely upon a business broker's form agreement.  In my experience the only person protected by a broker's form agreement is the broker.  The broker will often tell a seller that a lawyer will only slow up the process and add expense.  The broker has only one thing on their mind - the commission.  Make sure you talk with a lawyer experienced in business sale transactions when drafting the contract.  Sure, it does add some expense but it will likely pay off down the road.  A well-drafted contract can help you avoid litigation completely or it will provide better protection if and when litigation does occur. 

Source:  Thanks to Pennsylvania business lawyer Anthony Cerminaro for his post on the topic.

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