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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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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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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The Franchise King has a great list of 20 small business blogs that have the right stuff. These blogs possess some of the best content on the Web when it comes to small business. Be sure to check them out!

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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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Franchise attorney Charles Internicola busts the myth that franchise agreements are non-negotiable in his post, Myth:  Is it Illegal for a Franchisor to Negotiate and Modify the Terms of its Franchise Agreement. This is one of the best posts on the subject that I have seen.

In addition to the fact that you should take your right to negotiate the franchise agreement seriously, I would encourage you to stay on the alert for other common red flags from franchisors (I have written about these previously but it bears repeating):

1. You don't need a lawyer to review the agreement.
2. I would prefer you don't talk with other franchisees. You should only talk with me.
3. 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 considering an investment of your retirement savings in a franchise. You absolutely owe it to yourself to do the best job possible investigating that franchise and performing the most due diligence possible. That includes hiring experienced franchise counsel to review the franchise agreement and disclosure document. You need to talk with as many franchisees as possible but be sure to visit with those in your area. The success of a franchisee in New York, for example, may differ significantly than the success of a franchisee of Iowa especially when franchises are more of a regional flavor.

Some franchisors won't negotiate the terms of the agreement but that can be okay. Hopefully the franchisor can explain their reasoning for not negotiating a provision rather than hiding behind a blanket statement that they cannot negotiate because it is illegal.  You definitely want to deal with a franchisor that is willing to listen and 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 in court. 

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Liz Overton of Sullivan & Ward, P.C. has a timely post on how employers should deal with the H1N1 virus. 

While it's true that employers are currently under no obligation to allow additional time off to employees who do not have available time off or have exhausted their available leave, I could easily see employers facing a tough dilemma about whether to adjust their leave and/or PTO policies if a significant outbreak of H1N1 occurs at work, or perhaps even in our schools. 

Have you considered what you will do as an employer if a significant outbreak occurs?  Will you make changes in your policies? Whatever you decide, consistency and fairness are keys to avoiding legal problems.    

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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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Tiger Woods is the greatest golfer of his time. He was such a lock going into the weekend of the PGA Championship that an Irish bookmaker actually paid out the winnings on Tiger before the third round even started -- oops! I'll admit that I never could have imagined Y.E. Yang would actually pull it out for a victory.

But all of this provides a good lesson about trial law. You just never know what will happen when you go in front of a jury or judge. The case you thought was a lock may not be so.  When we are in the role of representing the underdog (which is often the case) I love it when the other side says we can't win. It motivates us, and frankly, it takes much of the pressure off. If you're not supposed to win you have nowhere to go but up!

So thanks, Y.E.. You proved why the game must be played, no matter who is in the lead (or who thinks they have the case that can't be beat).

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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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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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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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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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In this current economic downturn many people will lose their jobs.  Many of those individuals will turn to franchising as a form of business ownership instead of opting for another position in the corporate world.  While franchising may be a legitimate option for some, it is important for prospective franchisees to remember that it is not often very easy to get out of a franchise agreement.  Investing in a franchise is not a decision to take lightly.

A typical franchise agreement may last anywhere from 5-10 years and have options for renewal.  Often franchisees mistakenly believe they can get out of the franchise agreement if things go bad.  The reality is that the written franchise agreement usually remains in force and often the franchisor has rights to sue the franchisee for lost royalties if the franchisee does not pay.  Not to mention potential problems you will have with your lease and/or other contracts.

So before you buy a franchise follow these steps as outlined on the FTC Website:

• Study the disclosure document and proposed contract carefully.
• Interview current owners in person. (They should be listed in the disclosure document.) Visiting them in person may help you identify any that are "shills" — people paid to give favorable reports. Don't rely on a list of references selected by the company because it may contain shills. Ask owners and operators how the information in the disclosure document matches their experiences with the company.
• Investigate claims about your potential earnings. Some companies may claim that you'll earn a certain income or that existing franchisees or business opportunity purchasers earn a certain amount. Companies making earnings representations must provide you with the written basis for their claims. Be suspicious of any company that does not show you in writing how it computed its earnings claims.
• Sellers also must tell you in writing the number and percentage of owners who have done as well as they claim you will. Keep in mind that broad sales claims about successful areas of business — "Be a part of our $4 billion industry," for example — may have no bearing on your likelihood of success. Also, recognize that once you buy the business, you may be competing with franchise owners or independent business people with more experience than you.
• Shop around. Compare franchises with other business opportunities. Some companies may offer benefits not available from the first company you considered.
• Listen carefully to the sales presentation. Some sales tactics should signal caution. For example, if you are pressured to sign immediately "because prices will go up tomorrow," or "another buyer wants this deal," slow down. A seller with a good offer doesn't use high-pressure tactics. Get the seller's promises in writing. Any oral promises you get from a salesperson should be written into the contract you sign. If the salesperson says one thing but the contract says nothing about it or says something different, it's the contract that counts. If a seller balks at putting oral promises in writing, be alert to potential problems and consider doing business with another firm.
• Consider getting professional advice. Ask a lawyer, accountant, or business advisor to read the disclosure document and proposed contract. The money and time you spend on professional assistance, and research — such as phone calls to current owners — could save you from a bad investment decision.

In representation of a new franchisor I have recently been on the other end of this investigation process. But it is clear to me that a good franchisor will not discourage you from conducting due diligence.  You should be very wary of high pressure sales tactics.  Don't be in a hurry.

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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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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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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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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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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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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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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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Tonight I will be appearing on the Iowa Business Hour with Jim Goodman from 7:00-8:00 p.m. on 98.3 WOW-FM. 

I follow a long line of distinguished guests on the program including the incomparable Brett Trout. 

If you don't have anything else to do take a listen tonight.

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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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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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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.

Time and time again I see people invest their life savings into franchise operations.  Some of these people achieve great results but others do not.  There is no validity to the claim that franchise operations are less likely to fail than non-franchise operations.  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 whether the franchise is right for you.

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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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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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 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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When searching my feed reader last night I ran into this distressful thread on BlueMauMau.org, a pro-franchisee Web site.  In the comments below the initial post, franchise lawyer Richard Solomon says he is giving up on trying to help franchisees.  Richard says,

I'm about ready to climb down off the due diligence cross and go do something less stressful, like crisis management counseling. In crisis management, people really do want help and are willing to provide a budget for it.

I'll admit it.  There have been times where I have felt the same way as Richard when trying to assist franchisees in reviewing their franchise agreement and conducting due diligence.  There are times when a franchisee is going to do the deal come hell or high water.  But at this point I am not willing to stop trying to help these people. 

I think Richard's point is simple.  Isn't it unbelievable that people would be willing to invest their life savings in a franchise business but refuse to spend a little time and small expense to properly conduct due diligence?

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.  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 their deal.

I have been very fortunate to work with prospective franchisees that are serious about their due diligence.   Recently I had a prospective franchisee client that encountered all the classic warning signs from a franchisor.  I know this client felt disappointed the deal didn't go through but I was sure proud they were willing to walk away.  Only someone serious about their business would have done so.   

So don't give up Richard (and other franchisee lawyers).  It takes just one client to make you see this is all worthwhile and they definitely need our help.

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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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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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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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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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Doug Mitchell interviews Steve Reese who is the owner of Fitness Together franchise in Clive, Iowa in his first podcast of the Iowa Small Business Zone.  Listen and you will find that Steve is an enthusiastic proponent of franchising.   I was also impressed with Steve's impression of the potential benefits of blogging from someone who is new to the medium.  He views it as a way to improve communication with existing clients first and foremost. 

Steve's key in choosing a franchise?  Make sure the franchise has a proven track record.

Doug is a natural in the interview process.  I look forward to more podcasts in the Iowa Small Business Zone.

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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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As regular readers of this blog know, I am engaged in a never ending search for blogs that present franchise opportunities in a fair and objective manner.  All too often franchise related sites are merely promotional pieces. 

FranchisePick is a site worth checking out.  Yes, there are some promotional pieces on the site.  But franchise marketing veteran, Sean Kelly, has done an excellent job of presenting worthwhile information on several franchises.   

For example, recent posts on 30 minute workout franchises are hard hitting and full of information.  The experiences shared on the site are invaluable for anyone who is interested in making an investment in a franchise.  Sean likes to have fun, including making fun of my name, but he is on a serious mission to expose unethical practices in the franchise industry and encourage best practices.

Sean has a number of other sites covering the franchise industry including FRANBEST, Franchisor Marketing, and Franchisee Marketing.  He is also the President of IdeaFarm which specializes in helping franchise companies achieve growth through brand development and innovative marketing techniques.

Thanks to Sean for reaching out to me and exposing me to his sites.

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I have written in the past about Iowa Franchise Law and Territorial Encroachment.  Franchisees generally want an exclusive territory that is protected from encroachment by other franchisees or the franchisor's company owned stores.  But have you considered the impact of Internet retailing by the franchisor or other franchisees?

Be sure to review the territory provisions in the franchise disclosure document and franchise agreement with an eye toward whether the franchisor or franchisees are able to conduct Internet retailing.  In many instances franchisors will have a Web site but franchisees are not permitted to conduct online retailing.  While I am a big believer in the Internet for marketing and sales you will possibly suffer the consequences if a franchisor has a strong Internet sales presence.  Do you really have an exclusive territory if the franchisor conducts sales online?

Franchisors must also balance the possibilities of territorial enforcement with the need of franchisees to conduct online retailing.  This is where local search marketing comes into play.  Are there opportunities for franchisees to compete fairly online without cannibalizing each other? 

There are no easy answers when it comes to franchise Internet retailing but it should be a part of your decision making process in determining whether to buy a franchise.

Photo on flickr by aranarth

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At this past week's ABA Forum on Franchising I attended an insightful presentation with Michael Levitz, Kenneth Milner and Robert Purvin.  Purvin is from the American Association of Franchisees and Dealers which has some helpful tips and resources on its Web site to evaluate franchise opportunities.

While the presentation covered many areas of successful franchisee representation the concept of assembling a team to evaluate the franchise was probably most important.  In addition to the franchise lawyer, the presenters said successful franchisees will also contact the following:

1. Accountant - to examine the financials of the franchisor, costs and expenses to buy the franchise and financial projections of the business.
2. Real Estate Agent - to help you decide which location is best for you.  It is a mistake to rely completely on the franchisor in this context.  Most franchisors will be from out of the state and probably do not have a complete handle on the real estate market or trends in the community.
3. Marketing Professional - evaluate the marketing plan of the franchisor, develop your own marketing plan and assess whether the franchise opportunity is right for your region of the country.

I would also add that each prospective franchisee should also have a banker and an insurance agent to help them along in the process.  Assembling the right team is critical to success.

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This past week I had the opportunity to attend the ABA's Forum on Franchising.  What a great event!  First and foremost, it was an opportunity to network with some of the best franchise lawyers in America.   Second, I really enjoyed hanging out with fellow Iowa franchise lawyers, Matt Krigbaum of Cedar Rapids and David Bright of Iowa City.  These guys are excellent lawyers and terrific individuals.  If you are Eastern Iowa I recommend you talk with them regarding your franchising questions.

The initial seminar session I attended was the Fundamentals on Franchising.  Some top-notch franchise lawyers spoke during this 4 1/2 hour session but of particular interest to me was the talk by Ron Gardner of the Dady and Garner Law Firm in Minneapolis.   The law firm is regarded as one of the best firms in the country representing franchisees in disputes with franchisors.  In my franchise law work I counsel and negotiate on behalf of franchisees so the talk was very informative.

Some highlights of Gardner's talk:

1. If a franchisor is making certain promises you should attempt to have those promises included in the franchise agreement.  Often a franchisor will say certain things to entice a franchisee to enter into the franchise agreement.  But when you read the agreement these promises are no where to be found.  Get those promises in writing.  If not, you should have no expectation the franchisor will follow through on its promises.
2. Franchisees and their lawyers must communicate together on much more than just the franchise disclosure document or the franchise agreement.  In order to advise you properly it is important to know your background, your needs and your expectations.  Without this information it is often difficult to know what it important for you in a negotiation and what is not. 
3. Run Away from Franchisors that Won't Negotiate.  Some franchisors will tell you that they won't negotiate their agreements, or worse, tell you the laws and regulations do not allow them to negotiate their agreements.  Tell them to take a long walk off a short dock!  Ask youself whether you want to be in business with a franchisor that will not consider your busines goals and needs.  Fortunately, my experience has been that many franchisors will negotiate at least certain key terms and conditions.
4. Key Disclosure Issues.  Key disclosure issues generally include litigation, initial investment, vendor rebates, earnings, outlets and financial statements.  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.  As I have preached franchise due diligence must include interviews of franchisees, including those that have left the system, in order to get a full picture of the franchise system.
5. Be Willing to Walk Away.  I have touched on this before.  This is the paradox of negotiation.  You should not fall in love with the deal.  Prospective franchisees who are willing to walk away usually get much more from those who have decided to sign at all costs. 

More to follow on other aspects of franchising in other posts this week.

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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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The ABA's Forum on Franchising is this week in Phoenix.  This all-star seminar features intensive programs on the Fundamentals of Franchising and the amended FTC rule in addition to many other terrific programs.

Of particular interest is a talk by Brian Johnson about how to become the fluent, confident communicator you've always wanted to be - the always articulate attorney.

Stay tuned for updates on the seminar later this week.

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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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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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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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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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I ran across this list of tips for new small businesses.  Some terrific advice.  Here are the 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, so 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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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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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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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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I read an excellent article by Adam Siegelhiem of Stark & Stark concerning Restrictive Covenant Agreements for Franchises.  Although his post is intended for franchises it is advisable for any business to consider restrictive covenant agreements for their employees.

Somewhat surprisingly, many of the small business owners I talk with are reluctant to enter into restrictive covenant agreements with their employees.  These business owners are afraid that the employee won't sign or that other confrontations may occur.  Some just don't believe they should keep their employees from finding another job - even if it is to the employer's detriment.

But in order to avoid disruptions to your business and client relationships you should consider various agreements to protect yourself including, but not limited to:

• Confidentiality agreements;
• Non-compete agreements;
• Non-solicitations of clients;
• Non-solicitation of company employees.

If you are one of those who is not comfortable with a non-compete agreement for your employees I would strongly encourage you to have at least the confidentiality and non-solicitation agreements.  These agreements generally provide protection for your business without restricting the employee's ability to work elsewhere.  If a departing employee attempts to take clients or other employees with them you will be glad you had those agreements in place.

* Remember these types of agreements are very state specific so it is important to seek the advice of a business lawyer in your state before implementing the agreements discussed in this post.

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The owner of the North Grand Mall in Ames, GK Development, Inc., is holding a franchise expo this Friday and Saturday.  A number of franchising and business experts will give presentations including successful franchisees from Central Iowa.  The expo is designed to allow franchises and potential entrepreneurs the opportunity to connect with one another and to provide useful information for you to start your business.

I am scheduled to speak on Iowa franchising law issues at 1:00 p.m. on Saturday.  If you are interested in learning more about franchising we would love to see you there.   

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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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Today I had a discussion with another attorney about the the pros and cons of franchising.  We determined that while many business owners may think they want to franchise, it is often not the best alternative for their business.  If you are interested in the topic you may want to check out this article on whether you should sell franchises or build a chain of company-owned locations.  It is worth the read.

You may also want to read my article on 12 things to consider before franchising your business.

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Wiggin and Dana's Franchise Law Blog has a discussion about the amended FTC rules for franchises.  The new rules require franchisors to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise, its officers, and other franchisees.

Required disclosure topics include, for example: the franchise's litigation history, past and current franchisees and their contact information, any exclusive territory that comes with the franchise, assistance the franchisor provides franchisees, and the cost of purchasing and starting up a franchise. If a franchisor makes representations about the financial performance of the franchise, this topic also must be covered, as well as the material basis backing up those representations.  The new rules are designed to require more extensive disclosures in certain aspects of the franchisor-franchisee relationship.

The amended rules have a phased-in effective date: as of July 1, 2007, franchisors may follow the amended rules, or they may continue their current practice of complying with the original rule or individual state franchise disclosure laws that require an Uniform Franchise Offering Circular ("UFOC"); but by July 1, 2008, they will be required to follow the amended rules only.

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When reviewing the franchise agreement a prospective franchisee should pay careful attention to the territorial provisions contained in the agreement.  It is important to protect yourself from territorial encroachment and competition from both the franchisor and other franchisees.

Territorial encroachment is a frequent complaint from franchisees.  Usually this involves the franchisor granting a new franchisee a territory "too close" to an existing franchisee.  Sometimes it involves an affiliate of the franchisor placing an affiliated franchise (selling similar products) too close to the existing franchisee.  Unless the franchise agreement creates express protection for the franchisee's defined territory, a court may be reluctant to find a franchisor encroached on the franchisee's territory.

Be sure to review the territory provisions of the franchise agreement to make sure you have a protected territory.  The Iowa Franchise Act (specifically Iowa Code section 523H.6) does provide some protections against encroachment.  The downside is that while these protections may help you in litigation the damage may already have been done when you get to that point.  Moreover, there never any guarantees of success in litigation.  Be proactive and discuss the territory provisions up front with the franchisor during the due diligence process. 

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In its January issue, Entrepreneur Magazine published its Annual Franchise 500 for 2007.  One of the more interesting articles in the issue had to do with conducting due diligence.  As I recommended in a previous post the article discussed the importance of interviewing as many franchisees as possible in order to gain information about the franchisor.  Unfortunately most prospective franchisees do not conduct even basic due diligence, the article says.  Here are highlights of the article:

If you want to know more than the splashy brochures and franchise salespeople will tell you, then roll up your sleeves.  You can use a variety of methods to dig deeper and get the real lowdown on a franchisor.  The good news:  Most of these techniques are cheap or free.

1.  Mine Franchisees:  Be sure to ask tough questions.  Don't just shoot the breeze.  Also visit franchisees at their stores.  You get more information and it is an opportunity to see the franchise in operation.

2.  Dig in the UFOC:  The UFOC lists a great deal of information but many franchisees do not even give it a glance.  The UFOC will contain information about lawsuits, revenues and management.

3.  Ramp Up Research:  Search the Internet.  Are there any gripe sites?  See UPS Store www.thebrownboard.com and Quiznos www.toastedsubs.info as examples of gripe sites.  Be sure to take what you read on the Internet with a grain of salt and verify what you learn.

4.  Meet the Management.  Ask the tough questions of management as well.  One expert recommended that you ask the franchisor whether they will let you out of their franchise agreement if you are unhappy?  If they respond "Yes", they are lying and will say anthing to get you to sign.  (Franchise agreements are enforceable contracts and I have yet to deal with a franchisor that will let you out of an agreement voluntarily).

5.  Know the Market.  Do the market research and understand how the franchise fits into the competitive picture.  Also, think about how the market is going to change. 

6.  Get Advice.  The article advises to go to SCORE, have an accountant review the franchisor's financials and have an attorney review the franchise UFOC and franchise agreement.

Update:  I received an email today from a franchisee regarding this post.  He pointed out that the most difficult  information to obtain and verify is franchisee profitability.  He pointed out that the profitability of the franchisor and the franchisees is not always related.  He correctly stated that 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.

Forbes Magazine had an interesting article that provides Ten Good Reasons Not to Buy a Franchise.  Number 1 on the list is Questionable Profitability.  That makes extensive due diligence all the more important if you are considering a franchise purchase.   

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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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Franchise Law Blog reported that a group of Quiznos franchisees have filed a class action against the Denver based sandwich chain in Wisconsin.  The lawsuit contends that the franchisor forces franchisees to buy food and supplies from Quiznos and affiliates at inflated prices while setting retail prices so low the franchisees cannot profit.  The lawsuit also alleges that the franchise omits or misrepresents key facts about its business operations when selling the franchise. 

Quiznos denies the allegations and intends to vigorously defend the lawsuit.

Regardless of the outcome the lawsuit it provides an important lesson for prospective franchisees who are reviewing a franchise agreement.  Many franchise agreements contain restrictions on the products and suppliers the franchisee may use.  While this may seem reasonable in the beginning, (after all your buying a proven system, right?) many franchisees discover later they can get cheaper products and find better suppliers than the franchisor's system.  After some time franchisees may begin to question why he or she is paying for higher priced products along with royalties which eat into profits even more.  When this happens franchisees tend to get upset and file lawsuits like the one against Quiznos. 

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 top selling franchisor that you are getting the most for your money.  Above all, make sure to talk with as many current franchisees as possible and conduct your due diligence.

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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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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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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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In his monthly newsletter, Joe Cooney of Frannet points out the categories and questions you should ask franchisors to provide a starting point in your due diligence process.  Those categories and questions include:

1.  Competitive Advantage of Product or Service

How is your system better than others?  Who are your competitors?  How does your business match up?  Who are your suppliers?  What are the prices of your products?  Are your products priced fairly?  Are there any restrictions with regard to products and services?

2.  Time Tested, Standardized Franchise System

How long have you been franchising?  How many franchise units do you operate?  How many units have you closed in the last three years?  How many units have been transferred or sold in the last three years?  How many units do you plan to open over the next three years?  What is the initial investment and what do we get for that?  What are your fees?  What earnings claims do you make?  What improvements have you made to your system recently?

3.  Strong Franchisor Support

How do you support franchisees?  What is the initial training process?  What support do you provide after the franchise is up and running?  What will I hear from franchisees on this subject?

4.  Financial Strength and Management Experience

Describe in layman's terms the financial strength of the franchise system.  How much revenue comes from initial fees and how much from royalties?  Is the franchise publicly traded and how has it performed?

5.  Mutual Interest of Franchisor and Franchisee

How will franchisees describe their relationship with the franchisor?  Supportive?  Combative?  Have there been any lawsuits or abritration proceedings?  What was the issue and how did it end?

Remember this is only a start for the due diligence process.  You should be sure to interview as many franchisees as possible in order to better understand the franchisor and its system. 

Frannet is also offering free webinars on franchise opportunities in specific industries.  If you have any questions about the webinars you can email Joe Cooney at jcooney@frannet.com. 

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New York Small Business lawyer Imke Ratschko presents a helpful e-book on her blog "Small Business Guide to Risk Management - A complete guide for business decision-makers" published by the Association of Small Business Development Centers.

This easy to read guide discusses the many risks that businesses face and provides checklists to assess those risks and mitigate them to the extent possible.

In particular, employee related lawsuits are a major concern of many businesses.  The guide contains an excellent overview of the issues related to human resources.  From the human resource section:

At a minimum, employers should ensure that they are in strict compliance with all applicable federal and state labor regulations.  A next step would be to institute proactive management policies and practices to educate managers and employees about their respective rights and responsibilities.  Employee lawsuits are often a symptom not only of perceived transgressions, but also of low employee morale brought on by ineffective or indifferent management attitudes.

Another insightful section involves intellectual property including patents, trademarks, copyrights and trade secrets. 

I encourage you to check it out.

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A blog post by the New Jersey Law Blog discusses the recent trend of franchisors' attempts to expand the number of persons that will be covered under the non-competition clause in a franchise agreement.  Litigator John MacDonald believes that franchisors must have reasonably limited expectations when seeking to enforce non-competition agreements against franchisee spouses and relatives.

I agree with MacDonald.  I have reviewed franchise agreements on behalf of franchisees that sought non-competes against spouses.  But if the spouse is not involved in the franchise business I believe it raises serious questions about whether such a non-competition agreement is enforceable.  Some franchisors have been willing to take out the clause in negotiations while others have insisted the clause remain in the franchise agreement.  It will be interesting to follow this growing trend from franchisors and I would attempt to negotiate such a provision out of any franchise agreement you are considering if you are a prospective franchisee. 

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I was recently interviewed for an article written by Patt Johnson of the Des Moines Register entitled, "Franchise Owners Buy a Head Start".  As a part of my business law practice, I routinely review franchise agreements and Uniform Franchise Offering Circulars (UFOC).

The article featured several franchisees that are pleased with the franchise process and discussed the success of the local Maid-rite franchisor.  In the article I pointed out that prospective franchisees must keep in mind while franchising can give you a head start it is still critical to perform your due diligence.  You must interview as many franchisees as possible in order to get an accurate picture of a prospective franchisor.  It is also important to keep in mind that while you will be your own boss you will not have complete independence.  You will still need to live within the rules of the franchisor.

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The term, renewal and transfer provisions of a franchise agreement are often overlooked by prospective franchisees.  Many people focus on getting into the business but how you get out is just as important.  Therefore these provisions must be reviewed carefully.

The term of the franchise agreement determines how long the franchisee will be authorized to carry on using the franchisor's system and trademarks.  Normally the term is for a specified number of years (for example 5, 10, or 15 years).  The length of the initial term usually varies by industry practice, the initial investment required and the nature of the franchise business.

In most cases, the franchisor will offer the franchisee a right to renew for another specified term.  The renewal period may or may not be the same as the initial term.  Some franchise agreements provide only one renewal term while others will provide multiple or an unlimited number of renewal terms.   Certain conditions must usually be met in order to renew.  Generally, the franchisee must not be in default on any provisions of the franchise agreement including royalty and advertising payments.  At the time of renewal a franchisee is typically asked to sign the then current franchise agreement (which may include higher royalty payments and updating your location).  The franchisee is usually expected to provide a release for any potential claims against the franchisor for anything that occurred during the initial term.  The franchisee is generally required to pay an additional fee in order to renew.

Generally, there are no restrictions on whether the franchisor can transfer or assign the franchise agreement.  The franchisee, however, is often restricted in transferring or assigning the franchise agreement to another unless certain conditions are met.  The franchisee's ability to sell or transfer a franchise agreement will usually be subject to obtaining the consent of the franchisor.  A potential buyer must fulfill the requirements set forth by the franchisors including financial stability and training.   A franchisee who owns the rights to multiple franchises should also pay particular attention to whether the agreement requires the franchisee to develop all of the locations before the franchise rights can be assigned or sold.  The franchise agreement may also contain a right of first refusal provision which allows the franchisor the opportunity to buy the franchise at the price offered by another buyer.  Like the renewal provision, the franchisee is generally required to pay a fee in order to transfer the franchise rights.

Iowa law does provide some protection regarding renewal and transfer provisions which a franchisor cannot force a franchisee to waive.  See Iowa Code sections 523H.5 and 523H.8

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Yesterday I attended the Trade Regulation and Corporate Counsel Seminar sponsored by the Iowa State Bar Association. In his presentation on franchising, Mark Hamer of Meardon, Sueppel & Downer, P.L.C. confirmed a growing trend in franchising is that every clause is negotiable. This often includes some of the more troublesome issues for franchisees. This is a trend I have seen for some time.

Your ability to negotiate depends a great deal on your bargaining power. Is the franchisor new? If so, you probably have a great opportunity to negotiate terms. Are you financially solid? Are you buying multiple franchises? These are just some of the factors that may improve your bargaining position.

You may be told the franchise agreement is not negotiable by the sales representative. I would not let that deter you from attempting to negotiate certain terms of the franchise agreement. The key is to know what, when and how to negotiate franchise agreement terms.

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For over fifty years, the Sullivan & Ward law firm has represented rural electric cooperatives and generating electric cooperatives in the state of Iowa, as well as several electric cooperatives from across the country. Our attorneys, including John Ward and Michael Joynt, have gained national recognition for their expertise in the area of rural electric cooperatives and public utility law and are often speakers for various seminars throughout the country. Sullivan & Ward also represents many telephone and water cooperatives throughout Iowa.

In its capacity as general counsel for these organizations Sullivan & Ward advises companies and their boards on issues of corporate governance, general business functions, employment matters and litigation. The firm has extensive experience with matters unique to electric cooperatives including formation and organization, voting rights, tax issues, FERC issues, RUS programs and other regulatory matters.

Click here for more information concerning Sullivan & Ward's rural electric cooperative and public utility law practice.

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Review Study Before Purchasing an Iowa Franchise

In our last blog post we discussed the fact that there is no longer any validity to claim that franchised businesses are less likely to fail than independent businesses. Now the International Franchise Association (IFA) President recommends that all potential franchisee review a comprehensive study profiling the franchise industry.

For more information concerning the study go to the Franchise.org Web site and click on the Profile of Franchising before purchasing an Iowa franchise.

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I recently read an article in Trial Magazine entitled, "Litigating Fraud Claims for Franchisees" by lawyer Jeff Haff of Minneapolis. It is an excellent article. One of the more interesting points in that there is no validity to the claims that franchised businesses are less likely to fail than independent businesses. In fact, many franchisors stopped making this claim after the International Franchise Association (IFA), an organization compromised of mainly franchisors, issued a letter urging members not to use this sort of data to sell franchises. You should beware if a franchise salesperson still attempts to use this claim in order to sell a franchise.

Click here to see the full text of the IFA President's letter regarding the lack of validity to claims franchised businesses are less likely to fail.

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A Des Moines Business Record article discussed the growing number of franchises in Iowa. The article also discusses some of the pros and cons of franchising. A critic of franching described it as "indentured servitude by contract". He stated that some franchisees have a tough time continuing in the business after the end of the franchise relationship. While the criticism does have some validity most franchises are agreeable to extending the franchise beyond the initial term if the franchisee is not in default.

The pros of franchising include access to a network of similarly situated business owners. You can also gain market share quickly with an established name. Many frachisors will also provide marketing and management support.

The key is to thoroughly investigate any franchise opportunity. You need to talk to as many franchisees as possible to determine if the franchisor will keep their word. I usually tell clients to keep talking to franchisees until you hear something bad (that way you can avoid mistakes and get an honest assessment of the opportunity). Review the UFOC and franchise agreement carefully. It is a good idea to have the UFOC and franchise agreement reviewed by an experienced franchise attorney. A franchise is a substantial investment so do not take the decision lightly.

Click here to read the franchising article at The Des Moines Business Record's Website.

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It is a common misperception that franchise agreements are not negotiable. Often the franchisor will negotiate on certain terms and conditions. You may, however, run into a franchisor who will not negotiate the terms and conditions of its agreement. Is those instances should you still hire a lawyer to review the agreement? The answer is . . . (you probably guessed my response) yes.

Even if the agreement is not negotiable it is important that you fully understand your legal rights and your responsibilities under the franchise agreement. Most franchise agreements contain a significant amount of legalese that may be difficult for non-lawyers to understand. Further, there are important franchise laws in Iowa which you should become familar with to help you deal with a franchisor. (See Iowa Code 523H) Some of these Iowa laws are pro-franchisee and may be particularly helpful in the event you have a dispute with a franchisor. A lawyer can help you understand these laws.

An experienced lawyer who reviews franchise agreements and Uniform Franchise Offering Circulars (UFOC) frequently may also be able to assist you in determining whether the agreement is fair - even if it is not negotiable. The lawyer should be able to tell you whether the agreement and the UFOC complies with applicable laws and whether it contains the information franchisors are required to provide to franchisees.

Click here for more information about franchise UFOC and agreement review services.

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Are you looking to purchase a franchise business in Iowa? If so, you should consider having the Franchise Uniform Offering Circular and Franchise Agreement reviewed by an attorney to make sure the documents comply with applicable federal and state laws. There are a number of specific Iowa law provisions relating to transfers, jurisdiction, application of state law, renewal and selling your franchise which are often not contained in typical out-of-state franchisor agreements. A review can help point out those applicable Iowa franchise law provisions which may be helpful if you end up in a dispute with a franchisor.

A common misperception is that franchisors are unwilling to negotiate their franchise agreements. In fact, many franchisors are willing to negotiate certain terms with prospective franchisees. A review by an experienced franchise attorney can point out the areas for possible negotiation with the franchisor.

Overall, a franchise attorney review can also help give you a better understanding of your obligations as a franchisee and the duties of the franchisor. It is good idea to fully understand these issues before making the substantial investment required by most franchisors.

Click here for more information about franchise UFOC and agreement review when buying an Iowa franchise.

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Joe Cooney of Frannet will hold a seminar for those interested in franchising. The seminar is this Thursday, May 18, 2006 from 6:00 to 8:00 p.m. The seminar is located at the Mid-Iowa - SBDC office at 10861 Douglas, Suite B, Urbandale, IA 50322. The telephone number for reservations is 515-331-8954.

Topics covered will include:

- How to know you can get into business safely;
- How to find a business asset you can afford;
- How to identify the right business for your personal talents, skills and lifestyle needs

For more information email Joe Cooney at jcooney@frannet.com

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How to Hire the Right Attorney for Your Business

There are four professionals that your business will likely need for start-up and beyond.

1) Attorney,
2) Accountant,
3) Insurance Agent, and
4) Banker.

Recently I read article which quoted fitness video guru Billy Blanks as saying he learned how it important it was to hire the right lawyer after his law firm committed malpractice and cost him millions. So how do you hire the right lawyer for your business?

First, lawyers have become highly specialized. Hiring an attorney that does primarily non-business work is probably not best for your business. A business attorney will likely have a better understanding of contracts and business organizations. In the beginning you will need a lawyer that can help you understand whether a corporation or limited liability company is right for your business.

Second, does your lawyer understand intellectual property issues? With the Internet, intellectual property is becoming increasingly important. Your business lawyer should at least have a basic understanding of these issues. Intellectual property is also a highly specialized area of the law but a good business lawyer should have a close working relationship with an intellectual property specialist.

Third, your lawyer should be able to understand and negotiate real estate leases and other related contracts. Having a business lawyer review your lease can pay big dividends. Many business owners assume leases are not negotiable but most landlords are willing to negotiate in some manner and often on key points.

Fourth, how experienced is your lawyer? Do not be afraid to ask your lawyer direct questions about their experience level. Has the lawyer previously peformed the work you need completed.

Fifth, is the lawyer and the law firm well-situated to handle many type of business law issues? Because of specialization no lawyer is able to handle every issue that comes up in your business. Your lawyer should be able to get you to the right person when different legal issues come up. You should not have to go looking for a new lawyer with each different issue.

Sixth, has the lawyer worked in your industry? It is helpful if the lawyer has worked with other businesses in your industry. At the very least the lawyer should be willing to learn about your industry. Better advice will come from attorneys that understand your industry.

Seventh, is the lawyer willing to educate you? Part of lawsuit prevention is education. Your lawyer should be able to train you to spot issues and enable you to implement preventative practices to avoid lawsuits and other problems.

Eighth, is your lawyer fair with billing practices? For routine matters is your lawyer able to quote flat fees. If not this may be an indication the lawyer does not have appropriate experience. In litigation situations the lawyer may not be able to quote flat fees but should be able to give you a range of the expected costs. If you are asked to pay money up front please make sure that lawyer first deposits the money into a trust account for disbursement to the lawyer only when the work is done.

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Do you want to build the next Subway? Curves? or Jackson-Hewitt?

Ask yourself these questions in deciding whether you should franchise your business.

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

If the answers to these questions are "Yes" then perhaps you are a candidate to franchise your business.

Click here for more information regarding franchise UFOC and agreement review services.

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If you are considering a franchise you should conduct appropriate due diligence. One of the most important things you should do is contact as many current franchisees as you possibly can. For some reason this is often overlooked.

I strongly suggest you keep talking with current franchisees until you find someone who is willing to describe some problems or issues with the franchisor. Trust me - you will learn a lot more about the franchisor in that conversation than all the glorifying remarks put together. Because a franchisee has a problem does that mean you should look elsewhere? Not necessarily. It just means you are now able to make your decision with open eyes.

Click here for more information regarding franchise UFOC and agreement review services.

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Franchising is the most popular and fastest growing business model in the United States. There are thousands of franchises on the market. A franchise is a business "system" that allows people to share brand identification, a proven method of doing business and a successful marketing and distribution system. The selling point of franchising is that your assets are being put into a proven business. You may have the opportunity for a faster start up, developing a customer base more rapidly, and experiencing profitability with less risk.

With all opportunity there are pros and cons. The pros of franchises are that there is often a proven formula, owner training is available, and there is an ability to thoroughly review past records and company history. The cons of franchises are the royalty and national advertising fees are often significant and continue even though in some cases the ongoing support of the franchise is not stellar. A franchisor may get you into business but what they do after that is probably most important. If you pick a franchisor that does not have a proven system or good name identification what are you really buying? It may also be difficult to pick the right franchise or the right industry given the myriad of choices and sometimes financing options are limited.

If you are considering franchising a good resource to contact is Joe Cooney of Frannet. Joe is the Frannet consultant for Iowa and Nebraska. He routinely holds seminars in the Des Moines area and throughout Iowa. One of these seminars may help you decide whether franchising is right for you.

If you have any questions or need assistance reviewing a franchise agreement or Uniform Franchise Offering Circular you should contact a lawyer. Click here for more information regarding franchise UFOC and agreement review services.

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