Looking for a Franchise? Don’t Just Rely on the Franchise 500 and other Lists

By Rush Nigut on Posted in Buying & Selling a Business, Franchise Law, Franchise Review

For the last 40 years, Entrepreneur Magazine has released its Franchise 500 List, ranking the “best” Franchises in America. They rank them based on Five Pillars: Costs & Fees, Size & Growth, Support, Brand Strength, and Financial Strength & Stability. The giants at the top aren’t much of a surprise, with McDonald’s, Dunkin’, and Taco Bell all in the top 5. Many other big names are also scattered on the list. The Franchise 500 gives information on investment costs, and many other things you can expect if you decide to purchase a franchise for a specific company. If you are interested in purchasing a franchise, this list can be a great asset. However, it shouldn’t be your only resource, and most certainly does not tell the whole story.

The Small Business Administration keeps track of the default (failure) rates for franchises. The SBA releases a list of Top 50 Best (lowest) Default Rates, and a list of the Top 50 Worst (Highest) Default Rates of franchises every year. It’s a tool that gives a basic idea of how franchises for certain companies are performing and can be a great asset in your decision-making process. The SBA default rates are a great example of how the Franchise 500 doesn’t tell the whole story.

Among the Top 50 of the Franchise 500 based upon a recent review, only eight had a top 50 Lowest Default Rate: #4 Taco Bell (33rd Lowest Default Rate), #5 UPS Store (39th lowest default rate), #6 Culvers (12th lowest default rate), #8 Great Clips (19th lowest default rate), #11 Jimmy John’s (29th lowest default rate), #17 Sport Clips (11th lowest default rate), and #27 Hampton Inns (31st lowest default rate). Six members of the Franchise 500 have one of the 50 highest default rates, the worst of which is #356 on the list, Buffalo Wings & Rings. Buffalo Wings & Rings had the 11th Highest Default Rate at 66.67%. That means that two-thirds of the franchises under this company ended up failing.

The two best franchises when it comes to default rates in our review were Comfort Keepers at 8%, and Christian Brothers Automotive at 8.2%. Comfort Keepers is nowhere to be found on the Franchise 500, and Christian Brothers Automotive comes in modestly at #210. Another interesting point is that top franchises such as McDonald’s, Sonic, and others aren’t on either the Best Default Rate List or Worst Default Rate List. The 50th best default rate is at 25%, and the 50th worst default rate list starts at 52%. This means, that for McDonald’s and other top franchises, between a quarter and about half of their franchisees failed. That’s still a surprisingly large number, especially for companies that are supposed to be the very best franchises in America.

In conclusion, the Franchise 500 list is a common place to start someone looking to get into franchising. The list provides important information on investment costs, and other things that will help get you started. But also review the Top 50 Worst and Best SBA Default Rate lists, as that information can provide you a basic idea of the failure rates for certain franchises. Importantly though, please understand that purchasing a franchise is usually a significant investment and should not be taken lightly. When deciding on what franchise opportunity, prospective franchisees should take a multi-disciplined approach. Prospective franchisees should get a lawyer, accountant, banker, and even marketing professionals involved into the decision-making process. If a specific location is key (such as retail or restaurants), prospective franchisees will also want to consult with a commercial real estate agent. Make sure you do your research on initial investment costs, financial representations, default rates, franchisee satisfaction, and many other factors before you go into the franchising business.

https://www.entrepreneur.com/franchise500/2019

https://fitsmallbusiness.com/best-franchises-sba-default-rates/

*Special thanks to my summer clerk, Quinn Mahoney, for his research and assistance in writing this blog post. Quinn is an Applied and Computational Mathematics and Statistics Major at Notre Dame with a minor in Actuarial Science.

**We do not endorse any particular franchise opportunity.

US Women’s Soccer Team and Equal Pay

By Rush Nigut on Posted in Current Affairs, Employment Law

This blog post is written by Quinn Mahoney. Quinn is working as a summer clerk this year. He is an Applied and Computational Mathematics and Statistics Major at Notre Dame with a minor in Actuarial Science. In other words, he knows numbers.

This past week, the U.S. Women’s National Soccer Team (“USWNT”) won their second consecutive World Cup and record fourth overall. They cemented their status as arguably the most dominant and successful soccer team in the world, regardless of gender. Instead of chants of “USA,” the crowd chose to voice their opinion on the controversy surrounding the team, with chants of “Equal Pay” after the victory.

Back in March, (on International Women’s Day, no less) the USWNT filed a Class Action Lawsuit against the United States Soccer Federation (“USSF”), claiming gender discrimination on the part of their governing body. They believe they are being paid less than the men, despite their overwhelming success, because they are women. The USSF claims it’s purely based on revenue differences. So, who is right? Let’s take a dive into this situation. Please note that the analysis below does not consider the prize money for the World Cup, as that is a FIFA issue, and separate from the USSF lawsuit.

First off, the US women’s and men’s soccer teams are paid differently. The women have a guaranteed base salary that they earn regardless of results, plus bonuses for performance. The men have a “pay for play” system: they only get paid if they suit up, and the amount of money they receive for each game depends on the result. Under the women’s new Collective Bargaining Agreement which went into place in 2017, the women receive a base salary of $100,000 per year. They receive a $1,350 bonus if they win a friendly. The men receive $5,000 if they lose a game and can earn up to $17,625 if they beat a Top 10 opponent (or Mexico). Both teams are required to play in 20 international friendlies in a certain cycle. The Fact Checker for the Washington Post calculated that if both teams were to play all 20 matches, the women would likely make about 89% of what the men would. Under the previous CBA, the women would earn only 38% of what the men earn for the typical 20 game scenario (the women had a $72,000 base salary before).

As you can see, things have improved for the women. However, the USSF claimed that the differences in compensation were based on differences in aggregate revenue between the two teams. So basically, they claim that they pay the women less because they bring in less money. But that isn’t entirely true. According to an NPR article, from 2016 to 2018, the women brought in $50.8 Million in game revenue, while the men brought in $49.9 Million. So the women bring in more revenue, and should be paid equally, if not more than the men, right? Actually, game revenue doesn’t tell the whole story. Revenue from games only makes up approximately a quarter of the USSF’s revenue. Sponsorships make up about one half of the total revenue. The problem is, it is not clear which team brings in more money in terms of sponsorships. Documents reviewed by the Washington Post Fact Checker don’t clearly show which teams bring in more money in sponsorships, or how that money is allocated.

In conclusion, this may seem like a cut and dry issue, but in reality, it’s far from it. Yes, the women are much more successful than the men, but that doesn’t necessarily mean they bring in the same amount of money or more. If compensation is based on revenue, and if the women can show they bring in the same amount (or more) as the men, they at least deserve equal pay. However, unless we know who the real cash cow is for the USSF, we won’t know for sure how this issue will play out.

 

Link to the Washington Post Article

NPR Article

New Iowa Supreme Court Decision Helps Employers

By Rush Nigut on Posted in Business Litigation, Employment Law

The Nyemaster Goode On Brief Appellate Blog has a recent article on the Iowa Supreme Court setting a new standard in employment law cases. The court’s decision should help provide employers with an additional defense in discrimination cases.

The Court adopted a new standard for cases where an employee claims discrimination was a motivating factor in his or her firing, allowing the employer to offer evidence that it would have made the same decision to terminate the employee, even if discrimination was not a motivating factor.

In the process, the court reversed a $4.5 million verdict and an award of $856,954 in front pay and attorneys’ fees.

As a side note coming from a lawyer that’s been blogging on legal issues since 2006, I love the fact that the Nyemaster Goode firm and several other Iowa law firms have fully embraced legal blogging. It is absolutely great when our profession decides to educate the public and help people identify issues that may impact them.

Review Your Old LLC Operating Agreement: No More Tax Matters Partner

By Rush Nigut on Posted in Business Law, Business Litigation, Incorporation and LLC Formation, Uncategorized

There have been a series of changes over the past year in federal regulations that impact your old LLC operating agreement. Since I see on a regular basis operating agreements that do not incorporate the changes in the regulations, I thought I would mention a key change in this post. With the new regulations there is no longer a “tax matters partner” which you will see in most operating agreements. Instead, the LLC (partnership) must designate a Partnership Representative (the “PR”) who does not need to be a partner. The PR is similar to, but is different from, the tax matters partner. Formerly, the LLC/partnership was required to designate a tax matters partner to act as a liaison between the partnership and the IRS. That tax matters partner was required to be a general partner and could be an individual or an entity. The tax matters partner had the authority to bind the partnership, but not to bind other partners in the partnership. Also, a partner that was not the tax matters partner had rights during an examination, including certain notification rights and the right to participate in the proceeding.

Under the changes this past year, the PR is not required to be a partner, and can be any person (including an individual or an entity) with a substantial presence in the U.S. The PR has the sole authority to bind the partnership, and ALL partners and the partnership and its partners are bound by the actions of the PR and any final decision in a proceeding brought under the new regulations. In addition, the new regulations do not include a statutory right to notice of, or to participate in, the partnership-level proceeding for any person other than the partnership and the PR. If a partnership does not designate a PR, the IRS may select any person as the partnership representative, with certain limitations. A disregarded entity can also be the PR.

LLC members should consider amending their operating agreements because the powers of the PR with respect to the members/partners can be adjusted through the operating agreement. For example, a member/partner generally should have the right to approve or participate in certain actions of the PR. In addition, partners generally should have notification by the PR regarding certain events. Finally, the PR generally will want to be indemnified by the partnership for actions performed and costs incurred in good faith in the capacity as the PR. Keep in mind there is no requirement that the IRS communicate with the partners so these may be important provisions to amend in the operating agreement.

Be sure to talk with your tax accountant or your business/tax attorney regarding these issues.

Filing LLC and Corporations Never Easier in Iowa

By Rush Nigut on Posted in Business Law, Buying & Selling a Business, Franchise Law

Last May we announced that we were a part of a pilot program the Iowa Secretary of State’s office launched for fast track filing of limited liability companies (LLCs) and corporations. I am happy to report that the filing system has worked like an absolute gem. Now it is truly more convenient than ever to get your business formed within the State of Iowa. Our turnaround time for preparing and filing LLCs and corporations has been dramatically reduced. In my years of practice I must admit that this is one of the best projects a government office has pulled off. I give Iowa Secretary of State’s office major kudos for their work.

If you want to learn more about how we can help you set up your Iowa small business please see our Iowa Small Business Formation Services page for information. I know you’ll love the level of service we 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.

Iowa Lawmakers Looking to Politicize our Courts?

By Rush Nigut on Posted in Business Law, Business Litigation, Current Affairs, Employment Law, Franchise Law

Let’s get down to brass tacks. The main reason Republican lawmakers in Iowa are looking to change the way Iowa judges are selected is because they want protection for social issues like an anti-abortion bill they hope to pass this legislative session and due to the Iowa Supreme Court decision in Varnum from several years ago where the Iowa Supreme Court ruled that non-religious, civil marriage, is available to everyone. Since Varnum, special interests worked hard to oust Iowa Supreme Court justices. And now, these special interests are setting their sights on changing the process for the Judicial Nominating Commission that ultimately appoints judges in Iowa. Under the current system, Iowa lawyers elect one-half of the commissioners to the Judicial District Nominating Commissions while the governor appoints the other half of the members. Lawmakers want to change this so that lawyers no longer elect one-half of the commissioners but rather lawmakers from the political parties would nominate the other half.

Unfortunately, there is a perception on the part of some conservative lawmakers that “left-leaning” democratic lawyers control the judicial nominating commission and therefore are preventing conservative candidates from nomination. The actual facts though paint a different story. Currently, registered Republican lawyers hold the majority of positions on the Judicial Nominating Commissions. When you combine that with the fact that the last two Republican governor(s) have appointed conservatives with their appointments, 12 of the 14 Judicial District Nominating Commissions are currently controlled by registered Republicans. In the other two districts, the votes are split evenly.

But our judges should not be selected on the basis of political control. It should be based upon merit. It is about candidates who have the best qualifications, rather than the best political connections. We have long had an excellent system of justice in Iowa. Like any lawyer or the public, I do not agree with every decision issued by our judges. However, it is my belief that our judges do their best to make our court system fair and impartial. On survey after survey, Iowa courts have ranked high in judicial fairness nationally. Moreover, the positive feedback from Iowa lawyers on the Iowa State Bar Association surveys demonstrates the high quality of work performed by our justices. Even Governor Reynolds has admitted that she has had no problem with the candidates that have been brought to her. If it ain’t broke, don’t fix it.

My partner (and current Iowa State Bar Association President) Tom Levis has an excellent letter addressing the judicial nominating commission issues. I encourage you to read it and we also encourage you to reach out to your lawmakers and let them know that we do not want our judicial system increasingly politicized. We have enough issues and problems in Washington with political squabbling. Let’s keep that out of our Iowa court system.

 

Interesting Developments for Non-Competes and Trade Secrets

By Rush Nigut on Posted in Business Law, Business Litigation, Franchise Law

A major area of our trial and business law practice consists of non-compete and trade secrets law. We hear all the time from people that believe Iowa is a “right to work” state so that means non-competes are not upheld under Iowa law, right? Wrong.

Non-competes are upheld in cases where the scope and duration of the restrictive period is reasonably necessary to protect the employer’s interest as compared to the employee’s interest. Whether the non-compete will be upheld various greatly on the wording of the agreement and the position held by the employee.

But in a recent article from Seyfarth Shaw on some of the top developments in trade secret, non-compete law and computer fraud, I found it really interesting that government agencies are increasing the scrutiny of non-compete agreements. This is especially true in the case of certain franchises who had “no poach” provisions in their agreements. Lots of times these policies are used to prevent lower-wage workers from moving to higher paying jobs. Often fast food franchise operators have been found to have these sorts of provisions in their agreements. Attorney generals in several states alleged these provisions limited the earning potential of these lower wage employees and many franchisors decided to remove the clauses in the agreements due to pressure from the attorney generals.

Please be sure to read the article link for other interesting developments including a $700 million to a technology start-up In Texas for damages in a misappropriation of trade secrets case.

The Dilemma of a Start-Up Franchise

By Rush Nigut on Posted in Business Law, Buying & Selling a Business, Franchise Law

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?

By Rush Nigut on Posted in Business Law, Business Litigation, Employment Law, Franchise Law, Incorporation and LLC Formation, Starting a 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

By Rush Nigut on Posted in Business Law, Buying & Selling a Business, Incorporation and LLC Formation

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.

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