For twenty plus years now I have been reviewing franchise opportunities in one form or another. Unlike a lot of franchise lawyers, I represent both sides of the fence. I have helped business people start franchises and I have helped hundreds of franchisees review FDDs before buying franchise opportunities. Many years ago it seemed as though franchisors were afraid of Iowa. Those franchisors thought the Iowa franchise act was too restrictive and too franchisee friendly. But over the years, franchisors could no longer ignore Iowa. The economic success of Des Moines and its metropolitan area have made our community extremely attractive for franchisors from around the country, and with that, a new crop of Iowa franchisors are finding success with the franchise business model as well.

I have written a number of times about makes a good franchise opportunity. Some things I have discussed in the past is whether the franchise is a solid brand? Do people recognize the franchise? And does the franchise have systems in place that make it repeatable and scalable? But recently I have been diving in much further into what makes a particular franchise a good investment. In conducting my research I ran across a terrific article from Clearlight Partners entitled, Franchisors vs. Franchisees: Why Private Equity Likes Both. This article shares why private equity investors now like franchises for the strong investment returns potential.

We can definitely learn a lot from private equity investors. After all, these are the pros of investment. Some private equity firms have developed businesses that are valued in the hundreds of millions, and still others that are in the billions. In other words, these pros tend to know what they are doing. So what does private equity want to see in franchises? According to the article, private equity investors consider the following:

  1. Product or service that is straight-forward and can be consistently replicated;
  2. Product of service that is sustainably “on trend”;
  3. Universal appeal across geographies;
  4. Sufficiently long operating history;
  5. Critical mass of units;
  6. Good unit economics;
  7. Successful franchisees;
  8. Runway for future growth.

The article also goes into further detail to explain each consideration and also provides a detailed discussion regarding unit economics which I found helpful. Overall, its one of the better articles I have read on franchise investment. I strongly urge you to give it a read whether you are thinking about starting a franchise or becoming a franchisee.

I read an excellent article from the Franchise King, Joel Libava, that he wrote for the SBA website on what it takes to franchise your business. His article highlights various points including:

  • Validating the idea
  • Duplication
  • Creating a system
  • Legalities
  • Marketing and sales

We also had some Twitter discussion regarding the fees and royalties that are paid to franchises. It really goes without saying, for a franchise concept to work you need to have profit margins that are large enough for the franchisee to make a good living, pay employees AND pay royalties and fees to the franchisor. But I think sometimes this is missed with certain franchise concepts. When my clients start franchises I encourage them to turn franchisees into raving fans of the concept and the business model. Make franchisees profitable. Do everything you can to make franchisees successful and the franchise will in turn be successful.

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.

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

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.

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

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.

Continue Reading Filing LLC and Corporations Never Easier in Iowa

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.

Continue Reading Iowa Lawmakers Looking to Politicize our Courts?

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.

Continue Reading Interesting Developments for Non-Competes and Trade Secrets

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).

Continue Reading The Dilemma of a Start-Up Franchise