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

Over the years I've noticed that very few businesses actually plan for selling or passing on their business to employees or family. It's one of the most important things any business owner can do.

I've teamed up with business coach Monte Wyatt to provide a free seminar to business owners on business succession planning. The seminar is Friday, April 13, from 11:30 a.m. to 1:00 p.m. at the Brick Gentry offices located at 6701 Westown Parkway, Suite 100, West Des Moines, IA 50266. We will provide lunch.

If you'd like to come please RSVP by sending an email to rush.nigut@brickgentrylaw.com. Seating is limited to 20 people. We would love to see you there!

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A common thing I see from franchisees is that they include only the name of the franchisor in contracts as opposed to including the corporate or limited liability company name of THEIR franchisee business. Most of the time the names are different. For example, if I own a  "Subway" franchise but my corporate name is "Rush Nigut Enterprises, Inc.", I need to make sure I include my corporate name in any contracts. 

I have seen this happen way too many times to count. On one occasion a franchisee litigation client failed to include the name of his corporation in a contract. 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. Including just the name of his franchise in the contract was not enough.

Also, always be careful to always to sign with the title of your corporation or limited liability company, (i.e. President, Vice-President, member, etc.). This will assist in giving the proper notification to the other side that they are dealing with a corporation or LLC and not an individual responsible personally for the debt.

Be sure to contact a business lawyer if you have questions about whether you're signing contracts properly.

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Joel Libava a/k/a The Franchise King is running a great contest for prospective women franchise owners. It's called the ONE WOMAN. ONE FRANCHISE Contest. Joel is looking for one woman who is ready to make the commitment to be a franchise owner. He's going to help that woman choose, research and buy a franchise.

Joel is helping celebrate the launch of his new book, Become a Franchise Owner. I've read it and if you're interested in franchising, I recommend you read it too.

I have agreed to help out the contest winner with a franchise disclosure document and franchise agreement review. Several other sponsors are assisting as well including a business formation from CorpNet, a press release from Ignite Venture Partners, a six month subscription from Live Plan to assist with business planning, a consultation with online marketing expert Matt Mansfield, and a free book on finance from Nicole Fende.

Should be a great opportunity for one lucky prospective woman franchise owner. Register today!

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In the past many new business owners funded their ventures through home equity lines of credit. But with the decrease in home values over the past few years, it's been tougher for the start-up business owner to rely on home equity for funding. So what's a new business owner to do?

An article from the Wall St. Journal discusses How to Finance Your Start-Up without Tapping Home Equity. Some of the options include:

• Peer Lending - sites like www.prosper.com and www.LendingClub.com or Crowdfunding through www.kickstarter.com. 
• Asset-Based Credit - loans backed by marketable securities, equipment, inventory, accounts receivable and other business assets. Also factoring. 
• SBA Loans - Bank financing can often be tough for true start-up. Usually more viable as business becomes established.
• Angel Investors - The Des Moines Business Record recently had a story on Angel Investors in the tech sector. The number of angel investors are increasing in Des Moines and throughout Iowa but still low compared to some other parts of the country.
• Personal Credit and Savings - most businesses are funded this way. Bootstrapping a business can be very difficult. And not having enough capital can be fatal to the business.

All of these funding mechanisms are also in play for many franchises according to the Fox Rothchild Franchise Law Update. John Gotaskie says in his post that recent conversations with angel investors leads him to believe that angel investors are getting antsy from sitting on the sidelines and are interested in returning to the fray. If true, that's good news for franchises and small businesses alike. The momentum occurring throughout Iowa in the start-up community is also a good sign. You may need to get creative and beat the streets but funding is out there.

See also:Does Your Business Need an Angel?

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I was quoted in this article from The Street entitled, "When The Parent Company Drags You Down". The article discusses the financial woes of some franchises including Quiznos and the impact on franchisees.

If your a franchisee caught in a system experiencing financial problems, my first piece of advice is to carefully review the terms of your franchise agreement to make sure the franchisor is meeting its obligations to you. Another expert quoted in the article encourages franchisees to organize and band together. Banding together can enable franchisees to gather information and gives leverage and bargaining power with the franchisor, vendors and suppliers and even help with trademark rights, said Brian Miller, CEO of The Entrepreneur's Source. 

If your franchisor is experiencing serious financial issues, it's also prudent to speak with a franchise attorney to get an understanding of your rights.

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Joe Kristan of the Tax Update Blog has a very interesting post on So What is the Right S Corporation Salary? The blog post discusses a recent 8th Circuit case where a West Des Moines accountant had to pay FICA taxes on about $91,000 of his earnings from his professional S corporation --rather than $24,000-- the figure he had used as his W-2 income.

I've talked on this blog in the past about how S corporation salaries must be reasonable. There is definitely an opportunity for S corporation owners to save on FICA and Medicare taxes but determining what the IRS will consider as a reasonable salary is difficult at best.

The Watson case is instructive though. Watson had set his salary as $24,000 and claimed that was all his accounting firm intended to pay him. The IRS determined that $91,000 was a more reasonable salary in his case and the 8th Circuit agreed. But keep in mind that Watson earned about $200,000 out of S Corporation distributions. So all was not lost as he avoided the 12.4% combined FICA taxes and 2.9% Medicare taxes on the difference. The case demonstrates there is some happy medium for the S corporation owner and proper planning can certainly help in saving on taxes. I've known others who have been challenged by the IRS and faired very well when setting reasonable salaries.

Joe Kristan states, in responding to a comment from me, that every case is different and that the relationship between a reasonable salary and overall compensation is certainly not linear. He says, 

No matter how fabulously successful the company is, the salary should match the job. Heck, if the founding shareholder cuts back his hours and hires professional management, his salary might go down as profits go up. 

It's best in these situations to get good advice from your tax advisor before setting a salary for your S corporation. And as we've said before, "pigs get fat, but hogs get slaughtered." 

For more information see:  8th Circuit Decision and District Court Decision

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Lawyers are not immediately recognized as the most creative souls on the planet but some of the best lawyers I know definitely have the the creative spark. I have seen many who were classic doodlers, photographers and painters. Some of them were also the most creative in the courtroom and ultimately very successful in winning cases. That's why I am intrigued by the Iowa Creativity Summit that is scheduled for March 1st at Drake University (Olmstead Center). Your registration includes dinner and two workshops led by best selling author Matthew E. May. The evening program begins at 5:15 p.m. and ends at 9:45 p.m.

This is a great opportunity for business leaders and employees to familiarize themselves with the creative process. As the program says, creativity isn't just for marketers or designers, it's for everybody. Even lawyers and entrepreneurs!

For more information on the program click:  Iowa Creativity Summit

For more information on Matthew E. May click: The Laws of Subtraction

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Jason Shinn of the Michigan Employment Law Advisor had a great post entitled "Is your company making this mistake when it comes to employees and intellectual property?" The post centers on a lawsuit filed by an employee of Marvel Entertainment who claimed he created the Ghost Rider character back in the 1970s. With the recent success of the movies, video games and promotional products, the value of the character has increased substantially and the employee wanted his share.

Shinn's post discusses how Marvel eventually won the lawsuit filed by the employee, but it wasn't easy, and the case took four years to litigate.

The importance of written agreements with employees and contractors that create intellectual property cannot be understated. A case I will never forget involved the sale of a business. At the 11th hour a contractor claimed to own all the intellectual property a business owner was trying to sell. No agreements existed between the business owner and the contractor. Fortunately, we were able to negotiate a reasonable figure that the contractor would accept to allow the sale to go through but the lack of an agreement did cost the business owner money and almost cost them the sale.

So I wholeheartedly agree with Shinn's advice:

In this regard, for companies that want to make certain they are the owner of a work - whether the work is created by an employee or independent contractor - the best advice is to require employees and independent contractors to execute an assignment and work-made-for-hire agreement at the outset of the relationship so that copyright ownership vest in the company.

Don't wait until it's too late. That's a mistake you don't want to make.

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In this video I discuss a red flag I've seen come up in franchise agreement negotiation. Sometimes a franchisor will tell a prospective franchisee that they can't (or won't) change the franchise agreement. That's just fine but my problem comes when they say, "Don't worry though, we won't hold you to that provision." That is definitely a red flag!

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Maryland franchise lawyer Jeff Fabian has an excellent blog post on the issues to consider when the franchise agreement terminates on the Franchise Help blog.

In my experience many franchisees are under the misconception that they can simply change the name of their business and then begin serving the same customers the next day under the new business name. Wrong!

Most franchise agreements will contain a non-compete clause. And franchisees are surprised to learn that the customers may not belong to them at all.

Jeff's post covers these issues and more. Keep these factors in mind when you are initially reviewing the franchise agreement and considering whether to purchase the franchise. If a franchise term is 5 years, that can go very fast and you might find your bucket is empty at the end of the term.  

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I recently received an inquiry on the blog asking whether or not a spouse should sign a franchise agreement. Circumstances may vary, but in general, I usually recommend that spouses don't sign the franchise agreement if they aren't going to be involved in the franchise business. It's my view there is no reason your family should throw all your eggs in one basket by having both spouses sign a personal guarantee.

If a franchisor tells you it's required for the spouse to sign, push back. There is no such legal requirement. Plus, most franchise agreements have transfer provisions that allow the franchise to be transferred to the spouse in the event of death or other circumstances.

Other reading:  11 Things Every Franchisee Should Know.

Be sure to consult a franchise and/or business attorney for your specific circumstances.

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I am pleased to announce that I now have a Rush on Business You Tube Channel where I'll post short videos on various aspects of business and franchise law. I have a few videos posted so far and I'll add content weekly.

New videos include:

Should You Include Your Spouse When Forming a Small Business LLC?

Where Should Iowa Residents Incorporate or Form an LLC for their Small Business?

If there is a topic you think would be interesting, please let me know!

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

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

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

Register for the seminar today.

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

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

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

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

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

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

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

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

You can register for the event here.

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

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

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

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

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

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

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

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

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

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

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

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

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Franchise Times recently published its Top 200 systems issue in a story by Jonathan Maze. The big takeaway for me is that franchising is on an upswing after experiencing no growth during much of the recent recession. But franchising has returned as a bright spot in the economy according to the article.

Restaurants appear to be the big winner in my review of the list. It also appears as though fitness franchises are experiencing impressive percentage growth numbers. But don't mistake growth for profitability though, I've seen a number of fitness franchisees have trouble with profitability over the last few years, including some from fitness franchises on the list.

The success of McDonald's is pretty remarkable according to the statistics. Maze points out in the last six years McDonald's added more revenue that KFC sees in total for an entire year.

For a complete list of the franchises on the Top 200 list click here.

I also wonder what my friend The Franchise King would say about the value in these lists when researching franchise opportunities?

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Prospective franchisees should read a new book from The Franchise King, Joel Libava, called Become a Franchise Owner: The Startup-Guide to Lowering Risk, Making Money, and Owning What You Do.

I don't make that recommendation lightly. But Joel and I share a common passion. We are both passionate about making sure that franchisees investigate and research franchises carefully. All too often people invest their life savings in a franchise only to find out that the franchise wasn't for them. While proper due diligence and investigation doesn't guarantee success, it definitely gives you a better chance!

Joel's book is straight-forward and full of practical tips in researching franchise opportunities. He says that most people start off their franchise research by making two mistakes:

1. Going it alone without anyone experienced in franchising to assist them;
2. Starting the search by searching for a franchise. You've got to determine if franchise ownership is right for you first.

Now I must disclose that Joel included a short piece I wrote for the book on my thoughts in reviewing the franchise disclosure document and franchise agreement. After reading the entire book, I am even more flattered that he asked me to write the piece because I believe his book is the best I've read on the steps franchisees need to take in order to properly research franchising and how best to lower risk in the process.  It's a small investment ($8.99 for the Kindle version and $14.63 for the hard cover) but could save you big bucks down the road. If you're thinking about researching a franchise, my hope for you is that you read this book before starting. And if you've started, stop now and read this book before it's too late.

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