5 Reasons to Hire a Franchise Attorney

 It goes without saying considering I am a franchise lawyer, but I agree completely with the Franchise King who offered his Top 5 Reasons to Hire a Franchise Attorney in a recent post.

In my experience a lot of prospective franchisees skimp on hiring a franchise lawyer to review their FDD and franchise agreement. Many of those people seem to have serious misunderstandings about their rights and exactly what the franchise agreement says. I'll never understand how someone can invest their life savings in a business without legal advice. Interestingly, people tend to get legal advice when they buy independent businesses but the lure of franchising seems to gives prospects a comfort level that should not exist. Franchised businesses tend to fail at the same rate as independent businesses. Don't buy a franchise without legal representation. It's a big mistake!

Thanks to The Franchise King, Joel Libava, for the post.


Prospective Franchisees Need to Research Further Than FDD for Details

I read an interesting article from Entrepreneur on the Key to Understanding a Company's FDD (franchise disclosure document). It's an article I'd recommend prospective franchisees read but they better be prepared to go deeper if they really want to understand a Company's FDD. The author recommends checking three key sections of the FDD:

  1. Item 3 - Litigation;
  2. Item 19 - Earnings Claims;
  3. Item 20 - Turnover. 

While I agree in principle that these are three key areas of the FDD to understand, the reality is that these areas (particularly the items regarding litigation and earnings claims) often shed little light on the franchise offering. The problem is most FDDs provide very little detail regarding litigation and many franchisors still refuse to make earnings claims although according to the article it appears franchisors are increasingly providing earnings claims at least among the Entrepreneur Franchise 500.

Consequently, if you hope to learn more about the franchise offering you'll need to research further than just the FDD. You'll need to have in depth discussions with management and other franchisees. Come loaded with detailed questions. The FDD should not be your ending point in your research. It is really just the beginning. 

Selling or Buying a Business: Pay Attention to Why Deals Don't Close

Steve Sink wrote recently wrote a blog post on IowaBiz covering Why Deals do not Close. I recommend buyers and sellers of businesses to read the post. Fortunately, most of the deals I work on tend to close but from time to time there are issues with a deal or perhaps even litigation after a deal closes.

One of the biggest reasons I've seen that hampers a deal is when a buyer or seller has an unrealistic view of the sales price. This is particularly true for a seller. While I understand the notion that you want the best price possible, a seller should understand that it is important to have the transaction be a win/win. A Seller should want the buyer to be successful (particularly if seller financing is involved). Unfortunately there are lots of times that the seller, or maybe the Seller's advisors, don't understand this concept.  Even if your deal closes, you may run into litigation issues if the business is priced too high which will eat into the proceeds of the sales price.

Want your deal to close without litigation on the back end? Don't be greedy. Be sure to read the rest of Steve's list

Careful Planning Necessary When Using Retirement Monies to Fund Startup Business

Accountant Joe Kristan of Roth & Co. has an informative post on the IowaBiz Blog discussing the dangers of using IRA retirement monies to fund a startup business.  In the situation described, a would-be entrepreneur took about $320,000 from his 401K and rolled it into a self-directed IRA. From there, the entrepreneur invested almost all the funds into a new corporation. The IRS said this was a prohibited transaction that made the entire $320,000 immediately taxable. The tax court agreed and the entrepreneur owed $163,123 in taxes and penalties.

Many prospective franchisees choose to fund their new franchise purchase by using retirement funds. Franchise consultant Joel Libava asked in a blog post whether it is getting riskier to use your 401K to fund your start up business. Libava's post is a good one and he says he is comfortable with the plans if the paperwork is "perfect" and the business owner is in a good position to leverage his or her plan. But it's pretty clear that if you are considering the use of retirement monies to fund your business startup, you must be sure to plan carefully and seek advice from knowledgeable tax and legal advisors.

Some advisors like accountant Joe Kristan still are not hip on the idea saying,

They are at best a startup funding source of last-resort -- and if your business plan requires them, you might want to reconsider your business plan.

So be careful if you choose to fund your start up business with retirement monies. And if you have questions on tax and business issues I'd highly recommend Joe Kristan's Tax Updates Blog for other timely and informative articles.

Buying a Franchise: Consider Internet Retailing Encroachment

Franchisors often tout that they are selling an "exclusive territory" to a franchisee during the sales process. Franchisees generally want an exclusive territory because they believe this protects them from competition from other franchisees or the franchisor itself. But if you are a franchise who has been sold an exclusive territory, you better make sure you know what you are really buying.

Many franchise agreements contain a clause that allows the franchisor to reserve certain rights with respect to the territory granted to the franchisee. If your prospective franchise agreement contains a reservation of rights to the franchisor allowing it to conduct sales using different methods, it is not truly an "exclusive" territory. More often than not, franchisors will reserve the right to sell products and/or services online IN YOUR "EXCLUSIVE" TERRITORY. This has become even bigger in recent years as many retailers are now conducting sales and/or marketing  using social media and mobile apps.

Be sure to review the territory provisions in the franchise disclosure document (FDD) and franchise agreement with an eye toward whether the franchisor or other franchisees are able to conduct Internet, social media and/or mobile retailing. In many instances the franchisor will have a Web site, social media applications and mobile apps but franchisees are not permitted to conduct online retailing. This is problematic for a couple of reasons. First, if the franchisee is unable to conduct online retailing this takes away a significant marketing opportunity generally available to independent retail businesses. Second, if the franchisor conducts online retailing, and markets to the franchisee's customers or prospective customers (sometimes at lower prices than offered by the franchisee), this could harm the franchisee's ability to sell in their own territory.

As a prospective franchisee you need to have discussions regarding these issues when you are in the sales process with the franchisor. If you're told "we won't do that" by the franchisor, then make sure to get that promise in writing. If it's not in writing, such statements generally won't protect the franchisee if the franchisor later changes course and begins to compete against the franchisee through e-commerce.

The fine print is important when it comes to the territorial provisions of the franchise agreement. It is entirely possible, even with an "exclusive" territory, that you could face serious competition from the franchisor or other franchisees that you never expected when you bought the franchise. Know what you're getting with your franchise and ask questions during the sales process. Territorial reservation of rights needs to be a factor when deciding to purchase a franchise.

Government Shutdown Teaches Lessons in Negotiation

 I read an interesting blog post on the LexBlog Network from Tom Crane of the San Antonio Employment Law Blog called What We Can Learn from the Government Shutdown. The lesson Crane preaches that bullying tactics usually do not work very well in negotiation and tend to invite an equal response from the other side.

I agree with Crane regarding the fact that bullying tactics don't work well in negotiations. In my view there a couple of things you should remember in your next business negotiation. First, you need to leave some room for the other side to save face. This is true even if you have the upper hand and likely don't need to give in to the other side's demands. People need to feel as though they have gotten something from you. How can this be accomplished? One of the easiest ways is to have throw away points in the negotiation that you are willing to give up. So even if these points aren't important to you, the other side can still feel like they received something in return for their compromise.

Secondly, don't use ultimatums or say that you will "never" do something unless you really mean it. And even if you do mean it, it still is not the best idea to use this strategy. Ultimatums and saying you will "never" agree to something invites the same strategy in return. Such techniques build roadblocks to compromise and a successful negotiation.

A key is to disagree without being disagreeable. Something our politicians desperately need to learn.



Insight on Business - The News Hour with Michael Libbie

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

Michael and I will be talking franchise law and more.

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

Franchise Negotiation Tip: Be Willing to Walk Away

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

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

Be willing to walk away.

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

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


Proven Franchise Business System Just a Myth?

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

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

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

The Franchise King Reveals 20 Must-Do Things Before Buying a Franchise

Joel Libava (a/k/a "The Franchise King") has a list of 20 Must-Do Things Before You Buy a Franchise. It's a great list so I thought I'd share the article with you.

The last item on his list is to "Lawyer Up". Joel explains that the franchisor has a lawyer so franchisees should too. He also says to find a franchise lawyer rather than just any business lawyer. Both are excellent pieces of advice.

My experience is that often prospective franchisees are reluctant to hire a lawyer because they don't believe the franchise agreement can be negotiated. This isn't always the case. I've worked with a number of franchisors who are willing to negotiate certain terms in their franchise agreements. Additionally, it's important to understand what certain provisions mean. For example, you may believe you have a "fully protected territory", yet the franchise agreement may have provisions that limit this territorial protection. If you are investing a substantial amount of your life savings, isn't it worth a legal review to understand exactly what it is you're buying?

But most of all I like how Joel has set out a step-by-step plan for someone to explore franchise ownership. It's not for everyone. Franchise operations fail at roughly the same rate as independent businesses. So it's critically important to look inside yourself, examine your finances carefully and choose a franchise that fits within your talents and financial means should you decide to pursue franchise ownership.

Unique Look at Multi-Unit Franchisees: Empire Builders

I recommend prospective franchisees take a look at Empire Builders which is a series of videos highlighting successful multi-unit franchisees. 

Most of the prospective franchisees that come to see me are seeking to purchase a single franchise. Many of them dream of becoming a multi-unit owners but usually lack the capital (at least initially) to make that a reality. It's interesting to hear from multi-unit owners who have been able to harness the power of the franchising model and achieve great success. It is easier said than done.

There are some great videos in the series covering topics such as: 



Is a Franchise a Safe Investment?

Potential franchisees should read this article from Robert Purvin on Franchising Myth One: Franchises are Safe Investments. In the article, Purvin discusses how franchises and independent businesses fail at roughly the same rate (something discussed at length in several of my blog posts).

It's critical that prospective franchisees understand that buying a franchise will not automatically increase your chances of success. I hear time and time again from people about how franchises have a "system" and "they will help me with marketing and getting customers". It's not always the case. 

Purvin gives some good advice to help avoid mistakes when deciding whether to buy a franchise operation:

When you and your franchise attorney are reviewing the Franchise Disclosure Document, don’t limit your investigation to the closure rates. Look at the profitability of each location, especially those that serve in markets similar to yours. Do your due diligence and speak with current and past franchisees. Ask them direct questions about their profitability. It is especially critical to talk to past franchise owners and to ask them why they left the franchise. If you get any sense that the franchisees had trouble making a profit, then think very carefully before moving ahead.

Most importantly, insist that your prospective franchisor provide you with sufficient data to evaluate the profitability of the business. Limit your search to franchisors that make financial performance representations (formerly called ‘earnings claims'). There are many franchise opportunities available that are able to authentically boast high rates of success and profitability. These tend to be the top tier franchisors that require the highest investments and strictly limit their franchisee pool. As you go down the rungs of the franchising ladder to less well-known brands, new franchisors, and those with very low rates of entry, the risks typically grow.

Understanding that buying a franchise, just like starting any business, carries significant risk is the first step. You could lose your money. I see it happen to franchisees frequently. Be sure to approach buying a franchise just like it was your very own. Because in the end it will be up to you, not the system, to make it successful.


How to Deal with Partner Disputes

 I saw an interesting article on the LexBlog Network regarding how to deal with partner disputes. The post written by Texas restaurant lawyer, Matthew Sanderson, dealt specifically with restaurants, but the information contained in the post is applicable to any business. Sanderson recommends the following when a dispute occurs:

  1. Avoid the conflict by identifying motivators and doing your homework;
  2. Open the lines of communication;
  3. Stand up for yourself and your rights (but don't lose your cool).

I often compare partnerships to a marriage. In any marriage good communication is essential to maintaining a happy household. Where I've seen partnership disputes fester and cause problems is when the partners fail to communicate with one another. So I think Sanderson's bullet points are right on target.

Further, a helpful piece of advice for avoiding partnership disputes is to set clear expectations of what each partner is bringing to the table. Even though it isn't a part of your typical operating or shareholder agreement, you may what a letter of understanding defining the roles of each partner. Partnerships work best when the partners have complementary strengths. For example, a strong sales person combined with strong operations or details person may have a strong partnership together where two partners with the same skill set lack the balance needed to run the overall business.

Partnerships are not easy. Be sure to have a partnership agreement in place that details what happens if a dispute occurs or the partnership ends due to death, disability or other reasons. Sanderson's last point on not losing your cool is especially important. Make sure you think things through before you react and hopefully you'll be able to avoid costly mistakes if a partnership dispute occurs.

Plains Angels Investing in Iowa Companies

The Des Moines Register reported that investor group Plains Angels has invested $750,000 over the last eight months. This is great news for Iowa startup companies. Venture capital in Iowa has lagged and groups like Plains Angels are definitely trying to change that.

There is a $300 application fee to present before the Plains Angels' group. In some blog posts and other social media outlets, I've seen the fee criticized by some who expressed concern that it was just a fee collection group. I considered that assertion somewhat naive on the part of some seeking funding, but the recent news should alleviate some initial fears that the group is actually making investments in companies rather than just collecting fees. The significant investment made over the last eight months in three Iowa companies is very promising for the Iowa startup scene.

If you're interested in learning more about the process for Plains Angels or becoming an investor, be sure to visit the Plains Angels Website.

Iowa Business Court Judges Selected

In January  I wrote about the new Iowa Business Specialty Court Pilot Project.  This week the Iowa Supreme Court announced that three judges have been selected to hear cases for the business court. The judges include:

  • Judge Michael Huppert of the 5th Judicial District, which includes Dallas, Polk and Warren counties;
  • Judge Annette Scieszinski of the 8th Judicial District;
  • Judge John Telleen of the 7th Judicial District.

I have had the opportunity to appear before or work with all three of these judges. It's an excellent list of judges to get this pilot project off the ground.  Again, I'd like to see the threshold amount come down from $200,000 so that more business cases can be involved but it will be interesting to see how the new business court is received by lawyers and the public. Eligible cases can begin to be transferred May 1, 2013.

Trend Moving Toward Greater Protection for Franchisees?

With the recent passage of a new state law in Ohio and a new bill offering greater protection for franchisees in California, it will be interesting to see whether this growing trend of more pro-franchisee laws continues.

Interestingly enough it is Iowa that is often cited as a pro-franchisee state because of its franchise act. However, the growing economic market in Des Moines and throughout Iowa has not kept franchisors from establishing businesses in the state over the recent years. In my view, the opportunities for growth in Iowa far outweigh any negativity franchisors may have toward the Iowa franchise act.

But added protections for franchisees isn't necessarily a bad thing. Most franchise agreements are very one-sided in their terms and often have significant legal protections for the franchisors. You generally have a sophisticated business entity on one side (the franchisors) and less sophisticated people (the franchisees) on the other side. Most franchisees are small business people just looking to make a good living and may be investing their life savings into a franchise. Offering greater protections to franchisees should not hurt good franchise operators that deal fairly with franchisees. It will set them apart in the long run. Moreover, franchisees may feel more comfortable to go into franchise businesses.

So it will be interesting to see if the trend continues toward tougher franchise laws and the impact these laws will have on the industry.

5 People You Need To Meet When Starting Your Business

 There are 5 people every entrepreneur should meet when starting a business:

  • Lawyer;
  • Accountant;
  • Banker;
  • Insurance Agent; and
  • Marketing professional.

How do hire a lawyer that's right for you? See my article on my new site, Iowa Business Law Services.

As we are now in the heart of tax season, many business owners are looking for an accountant to complete their taxes. That's the wrong time to do it. Business owners need to establish a relationship with an accountant from the very beginning. It's important to receive tax advice on which business entity is right for your tax situation. Hiring a good accountant for your business is absolutely essential. A terrific accounting blog is the Tax Update Blog.

Lots of business owners also wait to establish a relationship with a banker until they need a loan. Again, that's the wrong time to start. Instead of opening an account at any old bank, get some recommendations and talk with business bankers before opening an account. Tell the business banker about your business and your plans. Try to stay in contact with the banker periodically if just to remind them you are still there. You never know when you might need a line of credit or loan. Establishing a relationship with a banker in the beginning can pay big dividends.

Find an insurance agent that specializes in insuring businesses. There may be hidden land mines out there that you can insure. I recently communicated with a business insurance agent regarding a contract matter for a client. The business insurance agent had important input that will protect my client moving forward. I seriously doubt an insurance agent dealing primarily with car and home loans would have known about the specific issues we were dealing with.

And if no one knows about you it will be tough to succeed! Consult with a marketing professional that is knowledgeable in your industry.  A tremendous blog on marketing is Drew's Marketing Minute.

Iowa Business Law Services: Rush on Business Companion Web Site

 I am very happy to announce my new companion Web site to go along with this blog at www.iowabusinesslawservices.com. The site will feature information on my legal practice areas, a simple way to submit information for formation of a new corporation or LLC and also a video resources section with tips on business and franchise law. We'll also feature many other business and franchise law resources as we develop out the site.

A new offering with the new site rollout is that I am immediately implementing a Subscription Services Plan to make legal services more affordable for the new or early stage company. Check it out for details.

I also set up a new Facebook page for the blog be sure to 'Like' the page for easy access to updates on business and franchise law.

Thanks so much for following Rush on Business. And look for some other exciting offerings from me very soon relating to franchise law.

Lesson # 5 From Hard Luck Franchisees: Restrictions on the Products and Services Sold

 The Classic Battle

A group of franchisees file a lawsuit contending the franchisor forces them to buy products and/or services at inflated prices while setting retail prices so low the franchisees cannot profit. The lawsuit also alleges that the franchisor omits or misrepresents key facts about its business operations when selling the franchise.

The franchisor, of course, denies the allegations and intends to vigorously defend the lawsuit.

The Issue

Many franchise agreements contain restrictions on the products and suppliers the franchisee may use. While this may seem reasonable in the beginning, (after all, you're buying a proven system, right?) many franchisees discover later they can get cheaper products and find better suppliers than they can using the franchisor's system.  The franchisees begin to question why they are paying for higher priced products along with paying royalties which eat into profits even more. When this happens franchisees tend to get upset and file lawsuits like the one described above.

If the franchisee agreement you are considering contains restrictions on products and suppliers be sure to consider those provisions very carefully. Be prepared to ask the tough questions of the franchisor when it comes to products and suppliers. Also, don't take for granted just because you are going with a franchise that you are getting the benefit of the franchisor's "bargaining power."

Above all, make sure to talk with as many current franchisees as possible regarding the products and services of the franchise and conduct your due diligence.

Lesson # 4 From Hard Luck Franchisees: Buying a Franchise in a Saturated Market or Industry


I've seen it many times. A certain market or industry becomes "hot" and all the sudden franchises start popping up all over the place. For example, a few years ago the 24/7 fitness market took off. In the Des Moines, Iowa area there were all kinds of fitness franchises that entered the 24/7 fitness market. Unfortunately many of them went out of business and only a few major players remain.

This happens in other industries. Right now the self-serve premium yogurt market seems to be really taking off. You add the toppings yourself and then weigh the cup just prior to paying. Looks to be a "hot" concept. But in the end how many of these franchises will be around in 10 years? Don't know but it's safe to say there will probably be some winners and losers in that market. 

It's not a surprise that a significant percentage of franchises will fail. After all, the majority of businesses fail within the first 5 years. With the typical franchise agreement lasting 10 years, it's important to choose a concept that will have staying power rather than just the latest "hot" concept.

Buying a franchise is a major investment. Success is not guaranteed. Choose wisely.

For interesting reading take a look at this article on the Top Franchise Trends for 2013.