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.

 

 

Starting a Business in Iowa: Do I Really Need a Lawyer?

You want to start a business in Iowa.  Do you really need a lawyer? My answer may surprise you.

Absolutely not!

Every day, many entrepreneurs do exactly that by using online incorporation kits.  There is definitely a segment of the market these incorporation companies serve.

The most obvious motivating factor for setting up a corporation or LLC on your own is to save fees.  But there is a potential trade-off.  You now subject yourself to the hassles of filing a corporation or LLC yourself and the possibility of filing erroneous paperwork.

But the real question to ask yourself is this:  “Have I considered how forming a business entity fits together with starting my business and my goals?”

Filing articles of incorporation or a certificate of organization for an LLC is only one step in the process.  Have you also considered:

  • Which is the right entity for me? Have I considered the best way to protect my assets? Do I form a corporation or LLC? Do I file for S election status?
  • What should be in my Bylaws?
  • Will there be multiple owners? Do I need a shareholder agreement?
  • Who should be on my Board of Directors?
  • Who will be the Officers?
  • Will I have employees? Should I have agreements relating to those employees? A non-compete?
  • How do I obtain an Employer Identification Number (EIN)?
  • What about banking arrangements?
  • How much stock do I issue? How do I capitalize that stock? What should the amount be for authorized but not issued stock?
  • Are there special issues involving how I intend to finance my corporation or LLC?
  • Will I seek venture capital or angel investment?
  • Where should I go for insurance?
  • How do I protect my corporate business name?
  • What are state government requirements?
  • What about taxes?
  • Am I set up to avoid lawsuits?
  • What are the corporate formalities I need to follow?
  • How should I sign documents to avoid personal liability?
  • Do I need to assign existing business to the corporation or LLC?
  • Will I have a lease?
  • What about protecting my company’s intellectual property?

The above list is just a sampling of the issues you may deal with from a legal standpoint as you start your business.  A good business lawyer should be able to help you with all these issues either by providing you with direct advice or connecting you with someone else (often accountants, bankers and insurance agents) that can help fill in the gaps.  Most successful business people will tell you that hiring a good lawyer is crucial to your business success.  The time to hire and build a relationship with a lawyer is not after you have been sued. Plus, you might actually be surprised at the cost of hiring an Iowa lawyer compared to some of the online incorporation companies. Most of the business lawyers I know provide good value for the services and advice provided.

So how to you hire a good business lawyer for your Iowa business? I suggest you follow two main rules:

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 has no or limited experience with business law issues.  Choosing a lawyer that is not familiar with business law may have serious consequences and may increase the costs because the lawyer may learn on your dime, or worse, create problems for you. 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.

Thinking of Starting a Restaurant in Des Moines? Look at the Market Trends

The restaurant business is a tough business. One of my friends was a banker. As a general rule, he would not loan to restaurants. Why? Because as a general rule the failure rate for restaurants is higher than most businesses.

Recently there have been several restaurant closings in the Des Moines area that has spurred a lot of discussion. Some local industry experts believe the Des Moines restaurant market is saturated and it is making it hard for restaurants to stay in business and succeed. According to the linked WHO-TV article, approximately 15 restaurants in the Des Moines area closed in 2017, compared to 39 openings. So it is probably natural for consumers to expect that some restaurants will close especially given that there are about 1,000 options for consumers in the Des Moines area. But the recently spike in closings certainly should give prospective restaurant owners pause.

On the franchise side, I have noticed over the past few years an uptick in the franchise options opening, not only in the suburbs where most of the franchise options historically located, but most recently several franchise options have also opened in the downtown area. This makes it even tougher for the small restaurant that must rely upon word of mouth recommendations for diners.

It definitely is an interesting market so proceed with some caution and carefully consider your options if you are planning a new restaurant at this time in the Des Moines area.

 

Iowa Secretary of State Increases Corporate Biennial Report Fees Beginning 2018

As my clients probably noticed this year, the Iowa Secretary of State increased the corporate biennial report fees for Iowa Corporations in 2018 from $30 for online filing to $45. Iowa LLCs will have the same increase in 2019. My understanding is that the increased fees is an effort to pay for business technology upgrades. The increase is set to expire in 2022, at which time the fees are expected to revert to the previous amounts.

UCC filing fees increased as well with electronic filings increasing from $5 to $10.

 

KEY LESSONS OUT OF THE SHARK TANK WITH BARBARA CORCORAN

The #DSMUSA business community had the distinct opportunity to listen to Barbara Corcoran of Shark Tank fame at their Annual Greater Des Moines Partnership Dinner. For me, the talk was extremely insightful and also confirmed many of the lessons I have tried to teach on this blog and to clients over the years. I have always been naturally cautious about founders seeking venture capital and angel investors. After all, over the years I have seen my fair share of legal issues between those founders and investors. Corcoran talk did nothing to change my views but I do understand that investment is often necessary and helpful so let’s get straight to some of the key points I gleaned from her talk:

  1. If you are seeking venture capital be honest and be prepared. Corcoran explained that only about 50 percent of the deals on Shark Tank get funded (with the exception of Mark Cuban who apparently funds 100 percent of his deals). Why? Because the show works in reverse order. The Sharks hear the presentations and come to a deal before due diligence is conducted. What does due diligence reveal? Quite often reality is much different than the presentations. Due diligence may reveal that the company does not actually hold its patent, the business may not actually even have sales or perhaps there is no real business plan in place.  The key take away is that you must have your ducks in a row if you expect to seek venture capital. A promise from someone to buy your product is not the same as actual sales. Be honest and prepared!
  2. Even if you get funding, your business is likely to fail. Yes, let’s repeat that. Even if you get funding, your business is likely to fail. Corcoran gave a startling statistic. She said that only about 10 percent of the businesses funded on Shark Tank actually are in business just three years later. I’ll admit, I thought with the Shark Tank marketing machine, and access to some great entrepreneurs, the number of successful businesses would have been much higher. But it is critical for people to know, being an entrepreneur is not for the faint of heart. When the lights of Shark Tank dim, and the hard part begins, most entrepreneurs can’t make it work. Same is true for businesses outside of the Shark Tank realm. Far more entrepreneurs fail than succeed. But what is one way to increase your chances of success? Actually sell your product before starting your business. Is there a prototype you can build? Is there truly a market for what you want to sell? Pre-sell your product!
  3. Entrepreneurs must be tough and resilient. Corcoran says she is always looking for the tough entrepreneurs who can stand their ground. Don’t just cave to investors whims. Stick to your guns! I have seen founders cave time and time again just to get investment. And rarely do those situations work out. Have a plan, be prepared and be willing to walk away if you don’t get the right deal. Corcoran says she has had the most success with people who have been “injured” because these people know failure but have the ability to bounce back when the going gets tough. And inevitably there will always be a rough patch. Those who are unable to bounce back quickly are rarely successful, no matter how smart they might be or how prestigious the school was that they attended.

Overall, I really enjoyed Corcoran’s story about her career and her insights. If you don’t already attend, I encourage you to attend the Des Moines Partnership dinners in the future. There is always a great speaker and its always a great networking event as well.

Franchise King Shares Top Franchise Trends and Predictions for 2018

For this week’s franchise post I thought I would share an interesting article from Joel Libava a/k/a “The Franchise King”. Joel recently wrote his Top Franchise Trends and Predictions for 2018. It is really an insightful look at the industry and a good read for franchisors and prospective franchisees alike.

One of the more interesting subjects in the article to me relates to Subway. Joel talks about how Subway has been having big issues. Yes, even established (correction: even the most established) of franchises have issues. Everyone is better off knowing that fact!

If you are interested Joel’s franchising blog is one to follow.

Starting a Franchise Company? Have Systems and Investment Capital in Place

I have received a number of calls recently about starting a franchise operation. On the one hand, it is awesome because the interest in franchising among Iowa business owners definitely seems to be growing. But on the other hand, most of these business owners are not ready to begin the leap into franchising just yet.

A lot of times a prospective franchisor might be getting a lot of encouragement from customers saying, “you should franchise!” While that’s wonderful often the prospective franchisor is operating only a single location, does not have adequate systems in place, and perhaps most importantly, lacks the investment capital to really make a franchise work.

The backbone of any successful franchise company is systems. You will need to create and completely document the systems that a franchisee will use to run their business successfully. You will need to create a training program that will teach a new franchisee what they need to know to become successful. You will also need to develop marketing plans that a new franchisee will use to obtain customers. And since you will now be in the “business of franchising” as opposed to your “former business”, you will also need to have systems that you can use to recruit new franchisees into your franchise company. There is a TON of work to do. You may be able to hire outside consultants to assist with all this work, but if you do, you are definitely going to pay significant dollars for that assistance.

Which brings me to the next point. You need considerable capital to get a franchise system off the ground. You will need to have a franchise disclosure document and franchise agreement written hopefully by an experienced franchise attorney. You will also need audited financial statements produced by an experienced accountant. You will need an operations manual that sets out your systems for a franchisee to run their business. All of this takes a significant investment on your part, and not only in terms of money,  but also time.

It takes lots of time, effort and money to get a franchise off the ground. There are a great deal of other factors that I have not even mentioned in this blog post. It is just the tip of the iceberg. It is not something to take lightly. It can be a great model for business but it is usually for the business owner who already has experience in managing multiple locations with great systems in place and significant investment capital at their disposal.

Sexual Harassment Claims will Continue to Climb in 2018

2017 was a watershed year for the publicity of sexual harassment claims. Time Magazine even named its “Person of the Year” as the Silence Breakers. Business owners should expect those claims to become even more prominent in 2018 as the masses, not just celebrities, begin to break their silence as well. Just yesterday, I saw a headline about a sexual harassment case locally involving two female teenagers that decided to come forward. In years past, I would say most teenagers would have feared bringing a sexual harassment claim. But this trend is here to stay and that’s undoubtedly a good thing overall for our workplaces.

Employers have an obligation to prevent sexual and other forms of harassment in the workplace.  At times employees will screw up but an employer must be prepared.  Some ways to avoid harassment claims include the following:

  • Have a written policy against harassment which should include an anti-retaliation provision for those employees who report harassment.
  • Provide and communicate in writing multiple channels for your complaint procedure. Employees should be able to report harassment to more than one person within the company.  The complaint process should be clearly defined in your employment manual.
  • Make sure you train supervisors each year and require supervisors to report harassing conduct.
  • Once notified of harassing conduct – take immediate action to investigate fully.
  • Do not retaliate against employees that make a complaint.
  • Discipline or terminate the offender as appropriate.

Also on this subject I saw an informative post from Marvin Kirsner of Greenberg Traurig that sexual harassment settlements with nondisclosure agreements will not be deductible under the new tax law. This  is definitely something to keep in mind when settling such lawsuits. Of note, attorneys’ fees will also not be deductible if nondisclosure agreements are used in the settlement.

 

 

LexBlog