The Dilemma of a Start-Up Franchise

I recently had the distinction of reviewing a franchise agreement for the very first prospective franchisee in a franchise. My review revealed there were still many issues to work out in the agreement and with the system in general to make it reasonable for the franchisee. But the potential opportunity was very intriguing to the prospective franchisee due to the financial success of the underlying business. Sometimes it is difficult to balance the legal issues (what I know from past experiences with franchises that have failed) v. prospects of financial success (i.e.the potential for a significant return on investment particularly with a new or inexperienced franchisor).

So what’s a lawyer to do?

In this case, we’re working with the franchisor to make some improvements to the agreements and system. We are asking that they provide us the proper information, disclosures and details. There must be some willingness on the other side to do this. In the early stages I think it’s absolutely critical for a new franchise to listen to that new prospective franchisee for input. It doesn’t mean the new franchisor should just give in to a franchisee. We were prepared to discuss the business case for how our suggested changes would benefit both sides.

So the dialogue is critical particularly with new or inexperienced franchisors. The framework of discussions should be more than what is best for the potential franchisee, but also, what is helpful for the entire franchise long term. If a new franchise won’t work with you on negotiations then it may very well be in your best interest to walk away from a deal. You don’t need to be the guinea pig. Let someone else take that risk. Be willing to walk away. Your savings may depend on it.

Do You Need to Take Risks to be in Business?

If you’re not a risk taker, you should get the hell out of business.

– Ray Kroc

I read the above quote today, and wondered, is this true? Do you really need to be a risk taker to be in business? And, if you don’t take risks you should actually get the hell out of business. Because as a business lawyer, our whole being is about reducing risks for clients, not advocating for it.

I have worked with entrepreneurs for 24 years as a lawyer. During that time I have also started and run some of my own businesses as well. Perhaps even some would have considered starting this blog a risk when I did so back in 2006. But never have I looked at risk quite the same way as Ray Kroc professed in the above quote. I do believe that business owners must take and accept certain calculated risks. And sure, I have worked with my fair share of business owners who leap first and worry about the consequences later. But generally the most successful business owners have a plan or a system that they know or have proven will work. They may have invested capital, which could be considered risky to some, but almost always those business owners knew they could expect a return from that investment. It wasn’t just a shot in the dark.

So in my mind the best business people are “calculated risk takers”. They don’t just gamble. In my experience, the successful business person actually finds ways to reduce risks as they move forward with their business.

Just thoughts for an entrepreneur to ponder.

 

Iowa LLC and Incorporation Fast Track Filing Services

I am excited to announce that I have been a part of a pilot project through the Iowa Secretary of State’s office which now enables our law firm to offer online fast track limited liability company (LLC) and incorporation filing services. Now it is more convenient than ever to get the legal assistance you need in setting up your Iowa business. Not only can you get legal advice you deserve from an Iowa business lawyer when you set up your business but you’ll be able to get that filing completed immediately rather than waiting for days or weeks before your business entity is actually registered.

We have already used the new system beginning its very first day, and we were able to complete a project in one day where we filed 40 LLCs on behalf of a client with unique needs  and all were registered the VERY SAME DAY with the Iowa Secretary of State.

I encourage you to check out the information on our Iowa Small Business Formation Services to see how we can help you set up your business quickly and properly. Frankly, I think you’ll be amazed at the level of service we can now provide to new business owners.  We still offer in-person meetings for those that want to discuss their business set-up directly with a lawyer but we are also just an email or call away. Even if you don’t live in the Des Moines area we can still help you set up your Iowa business. We have clients from all over the State of Iowa. We look forward to working with you.

Michigan State $500 Million Settlement Should be a Wake Up Call for Business and Organizational Leaders

On our new Brick Gentry Trial Team Blog I write about how the $500,000,000 settlement Michigan State is paying to the young women sexually abused by Larry Nassar sends a strong message to business and organizational leaders.

DO THE RIGHT THING!

I know it is a really simple message. But organizations consistently minimize, hide or ignore bad behavior. It is incumbent upon organizational leaders to step up and do the right thing when wrongdoing occurs.

Buying a Franchise: Is it Really a Proven Business Model?

One of the things I hear over and over from distressed franchisees is that they purchased a franchise because it was a “proven business model.” Now, I don’t blame most franchisees for this thought process as they head into their franchise business purchase.  The franchise industry has done a remarkable job of marketing itself where people are preconceived to believe franchises are proven business models. Second, some franchises have been in business for a long time which naturally leads someone to believe it is a proven business model. After all, a franchise would not be in business for a long time if it were not proven, right?

But here are some important things to consider when buying a franchise:

  • Please know and understand that franchises fail at approximately the same rate as other business opportunities. When you understand this fact you will know that franchises are not necessarily “proven business models.” Even franchisees from very successful franchises do fail. DO NOT go into a franchise opportunity thinking you will be successful based upon the business model alone.
  • How long has the franchise been in business? If the franchise is relatively new, does it have a history of operating multiple locations as an independent business? How successful were those independent businesses? If the franchisor has not operated multiple locations in a successful manner, how can the business model possibly been proven?
  • Is the franchise business model trending in the right direction? There are many franchises that have been in existence for many years, sometimes decades. But be careful. Some of these franchises are not trending in the right direction. They are losing franchisees. Franchisees are struggling. If you see a franchise that used to have multiple locations in your area, but now it is down to one, that could be a really bad sign. You need to investigate and perform due diligence on the trends of the franchise and how franchisees are doing financially.

The issue is that all franchisors are not created equal. There’s no guarantee that the franchisor has developed a successful business model or is able to sustain that business model into the future. In fact, many franchise business models are not successful at all. The truth is many franchises out on the market may have no real system, no brand recognition, no marketing plan or perhaps even little to no business experience with the franchise owners.

Don’t get into the mindset that you’ll receive a turnkey operation that will run itself. You will need to work your tail off to make your franchise operations work. If you don’t, you are almost sure to fail. Unfortunately, I’ve seen way too many people who didn’t understand this before they bought a franchise. Franchising does not guarantee success. Don’t automatically assume that just because a business has franchised that it is successful, or that the franchise can create success for you. Because at the end of the day your success will most assuredly rest upon your shoulders.

How to Spot and Run a Successful Franchise

This article on how 5 Successful Owners Tell How They Spot and Run a Successful Franchise is from Australia but just because it is from “Down Under” doesn’t mean the words of wisdom aren’t applicable in the United States. One of the better ideas I took from this article is the importance of local engagement. I think a lot of times franchisees are attracted to a franchise because it may be a regional or national brand, which is understandable, but ultimate success is still determined on how well you connect your franchise business to the local community. As one of the experts quoted states:

“The most successful franchises often demonstrate the highest commitment to engaging with local communities both online and offline, creating value for existing and new customers through sharing customer stories/experiences, value-add promotions and retention campaigns – which may need to differ depending on the local catchment.”

Another point to strongly consider is the franchisor’s unique selling point. You need to know your competitors and the nature of the LOCAL market. What works in San Diego may or may not work in Des Moines, Iowa.

Hat tip to Joel Libava a/k/a The Franchise King for posting this article. Be sure to check out his Franchise Business University online.

 

Changes in Sexual Harassment Laws Coming?

I saw an interesting blog post from Brian McGinnis of Fox Rothchild that Minnesota is considering a sweeping change in its sexual harassment laws. The proposed change states,

An intimidating, hostile, or offensive environment … does not require the harassing conduct or communication to be severe or pervasive.

McGinnis does a nice job of explaining just what this may mean for businesses and the flood of exposure that may come as a result of removing the severe and pervasive standard.

Will such language changes make its way to Iowa? With the recent cases involving sexual harassment in our state government, there’s no question that more attention will be devoted to the issue. Currently, Iowa law says for state employees “sexual harassment” means persistent, repetitive, or highly egregious conduct directed at a specific individual or group of individuals that a reasonable person would interpret as intentional harassment of a sexual nature, taking into consideration the full context in which the conduct occurs, which conduct threatens to impair the ability of a person to perform the duties of employment, or otherwise function normally within an institution responsible for the person’s care, rehabilitation, education, or training. With claims on the rise due to the #MeToo movement and our governor calling for an independent review of harassment at a state agency, it is not out of line to think Iowa and other states could see similar changes as proposed in Minnesota in the near future.

What does this mean for your business? See my article written in January discussing the rise of sexual harassment claims and what you might be able to do as a business owner to not only avoid liability, but also better your workplace. Don’t bury your head in the sand. Move quickly to stay on top of training and educating employees on harassment and discrimination issues, or you may potentially pay a far greater price than the training and education will cost.

Franchise Attorneys Discuss Buying a Franchise

I had the distinct pleasure of being interviewed by Joel Libava (aka “The Franchise King”) for his exclusive article on buying a franchise. It was a fascinating article for me as well because Joel interviewed fellow franchise lawyers Charles Internacola and Josh Brown. They really had some great insights you won’t want to miss.

If you are considering a franchise it is a great article to read.

What if Franchisors Did Not Terminate Franchisees for Poor Performance?

I recently saw an interesting TED talk on how to be a great leader from Simon Sinek. In the talk he told a story about a business owner who refuses to fire any employees for poor performance. Instead, the company coaches their employees to perform better.

Imagine if franchise operations followed the same philosophy and did not terminate franchisees for poor performance.

In my experience many franchisors do the exact opposite. I usually see little effort to coach up and improve the performance of poorly performing franchisees. Demands are generally made of franchisees to catch up with royalties and other fees. If payment is not made, termination often occurs. All too often I see the decision to terminate is made with little effort to get the root cause of the problem or help the franchisee. Rather than trying to work with a franchisee, it seems as though it is far easier to cut ties.

My theory is this occurs for a couple of reasons. First, many franchisors are really good at getting people into business but not necessarily great at keeping them in business. Second, there are very few obligations written into most franchise agreements for the franchisors to actually provide a level of coaching and assistance. But despite these concerns, most franchisees will tell you the reason they purchased a franchise business was because of the assistance they believed they would receive from the franchisor. An interesting dichotomy indeed.

So what to do? Well, good franchisors do coach their franchisees. If you are considering a purchase of a franchise, don’t just talk with successful or happy franchisees. Talk with those that have struggled. Find out if the franchisor has done anything to help the struggling franchisee. Does the franchisor provide excellent training programs? Do they actually have ongoing operational support? And do they actually provide marketing assistance? These are just some of the questions to ask. You want a franchisor that makes your success a priority. And unfortunately, that is all too often not the case.

Assault on Iowa Courts Should Worry Everyone

A year ago I joked that I didn’t know the governor (Branstad at the time) and the legislature could cut another $7.7 million from our judiciary. While my comment was tongue-in-cheek, my worries were not. Our Iowa judiciary is facing challenges like we have never seen before. And it’s showing.  The US Institute for Legal Reform had Iowa ranked number 4 among the US states for its judiciary in 2015. In just two short years, we have fallen to number 13. And there is reason to expect us to continue to fall as the Iowa legislature is set to cut another $50 million from state agencies in 2017, including another $4.8 million from our judicial branch.

But as this is about to happen, the judicial branch is so far down on the list of issues that matter to voters it barely even registers. At some point though the people of Iowa will notice but will it then be too late? Consider what these additional cuts may mean as as spelled out by Iowa State Bar Association President Steve Eckley in the latest edition of the Iowa lawyer:

  • Approximately 30 Iowa courthouses will likely close;
  • Additional layoffs will occur as 96 percent of the judicial branch is comprised of personnel costs;
  • Fewer criminals will be arrested and will be more likely to have charges dropped;
  • Victims of domestic abuse, individuals with mental health or substance abuse, parents with family law problems and juveniles in need of court services will be less likely to seek help or unable to get it due to the increased costs of travel time to courthouses outside their towns;
  • Businesses will find it harder to collect accounts, enforce contracts and resolve disputes;
  • Traffic matters will be much harder to resolve due to delays, inconvenience and increased costs;
  • Civil litigants will have problems as they will be the lowest priority; and
  • The Iowa economy may suffer (for example three years of state court funding cuts in Georgia created drastic changes in the total economic output to the tune of $337-$802 million annually.

The worst part about these cuts is that the Iowa judicial branch is essentially self-supporting. The judicial branch only received $175 million of the Iowa budget of $7.2 billion last year (2.5 percent of the total budget). Through collection of fines, fees and court costs the courts paid nearly $150 million into the general fund and several other state funds. In addition, the judicial branch saved the state more than $30 million by diverting individuals from correctional facilities and other expensive programs.

Why is there such an attack on our Iowa judiciary? Eckley speculates, and I believe he is correct, that the real answer is that certain Iowa state legislators have made it known that the courts would receive more funding if the judges made more favorable decisions. As Eckley declares,

This should be a clarion call not just to all Iowa attorneys, but to all Iowans who believe in basic democratic principles enshrined in our Constitution.

If we have courts that make decisions that are biased in favor of those who have political influence we will all lose. You, me and likely even one of those legislators at some point. We must have a properly funded AND independent judiciary. Ignore this issue at your peril!!

Updated information: based upon comments from one of my sources it appears the legislature may not cut quite as much as expected, although cuts are still likely to be in the $1.8 million range, which would still cause some significant issues for providing judicial services.

 

 

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