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

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

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

Other reading:  11 Things Every Franchisee Should Know.

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

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

New videos include:

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

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

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

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

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

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

Register for the seminar today.

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

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

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

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

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

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

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

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

You can register for the event here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Over the last 5 years that I have been writing this blog, there haven't been many Iowa business lawyers who write a blog on a regular basis. But when I was looking at Mike Colwell's Startup Models site, I noticed a new blog from business lawyer Chris Sackett of Brown Winick called BizB4Law.

Chris wrote a post I wish I had written called I Like Clients Who Don't Like Lawyers.  Chris says,

This post, of course, runs the risk of offending lawyers, but I suppose the whole premise is that lawyers need to get over themselves and think like the business people who are their clients.

Well said. It's a super post. Check it out.

If you're working on a business plan or financial model for your startup business, be sure to check out Startup Models too. It could save you a lot of time, expense and effort.

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I had the opportunity to attend the Forum on Franchising in Baltimore this past month. The Forum Chair, Joseph Fittante, was recently interviewed by BlueMauMau on the state of franchise law which I thought was important to share.

Fittante commented that he is seeing more high stakes litigation. In his experience the number of litigation cases are decreasing but more of those cases are going longer than before. (That's my experience as well by the way, so if you are a franchisee looking to end an agreement or recover damages, you can expect a strong fight from the franchisor).

Fittante also mentioned the significance of the KFC case decided by the Iowa Supreme Court. The Iowa Supreme Court ruled that a foreign corporation could be taxed on revenues received from the state of Iowa even though the company had no physical presence within the state of Iowa but rather received royalty revenues resulting from intangible property (i.e. the use of trademarks and licenses to franchisees) within the state. Fittante expects that more states will look to raise additional revenues through similar taxation methods or through the misclassification of franchisees as independent contractors v. employees.

Finally, Fittante also said he doesn't believe we will see a federal franchise relationship law that governs the franchisor-franchisee relationship but that will continue to be controlled by state law. He has a point that it's nice to know what the rules are rather than have ambiguity which happens when state laws vary so widely. 

Overall, I was impressed by the presentations at this year's Forum. Hats off to Fittante and many others for their hard work!

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The last post touched on Franchising Your Business. To continue learning more about factors to consider in franchising your business, I highly recommend this post on the New York Franchise Law Blog called Franchising Your Business: What You Can Learn from Existing Franchisors.

One of the most important points from the post is the fact you need to have adequate capital to franchise. Bootstrapping your business may be vogue now but franchising isn't something where that works. It takes significant capital to run an effective franchise operation - even if it's low cost franchise offering.

Bottom line, you can't do franchising half way. It will come back to bite you big time.

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

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

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

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

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

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

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

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

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

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

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

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

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

The full Iowa Supreme Court opinion can be read here.

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

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

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

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

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

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

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

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

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Steve Sink has a post on IowaBiz entitled Using an appraiser to value the business. It's a worthwhile read.

Steve brings up a good point that many buy/sell agreements are silent on the qualifications of appraisers. He writes that the qualifications of appraisal firms should be specified based on their size, the scope of their business, and perhaps, on their specific industry expertise.

Of course, business appraisals can be expensive. Consequently, I often advise clients to establish a formula for how they will value the business when we draft the buy/sell agreement. This approach not only lowers the expenses for the the buyer and seller upon sale but also provides greater certainty to the eventual purchase price.

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I advise business owners to seek the advice of an accountant when they are forming a corporation - particuarly if they have multiple businesses. A recent post from accountant Joe Kristan on IowaBiz shows why as a Michigan couple ended up with a $16 million problem in Tax Court.

As the saying goes, "An ounce of prevention is worth a pound of cure."

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