Recently I had a conversation with a very successful small business owner I have known for a long time that really shook me. I learned his sales are now down 80% during the latest surge of the pandemic . He said,

The virus is killing us. People are scared.

Meanwhile, Amazon’s sales increased 40 percent in the second quarter alone, while their stock price increased 97 percent. Apple hit a $2 trillion market cap, the first publicly traded company to do so, and reported nearly $60 billion in revenue. Since the pandemic began, Facebook’s stock rocketed up 85 percent, Google’s by 50 percent, Netflix by 63 percent, and Microsoft by 57 percent. All saw their revenues greatly increase compared to last year’s numbers as well. [Source: How Big Government Stacked the Deck Against Small Business}. And of course the stock market has reached all-time highs.

Small businesses though are struggling around the country. Nearly 1/3 of all small businesses have closed in New York and New Jersey in 2020. And the national average for small business closures this year is nearing 30% according to a Harvard run database, TracktheRecovery.org. The database shows that the number of small businesses open in Iowa are down 29.3% as of November 25, 2020, and we are unfortunately trending in the wrong direction at this time.

Iowa and other parts of the country did see an uptick in small businesses open after the stimulus checks started in April earlier this year. But with our government bogged down will help be on the horizon as the down-turn continues? To be candid, large corporations are not the actual culprit for small business problems. It is our government. Government has stacked the deck against our small businesses. Our government arbitrarily determines which businesses are essential, and which businesses must close. In one video I saw on Twitter, a small business owner in California was forced to close her bar and outdoor patio, while a large movie company directly across the parking lot was permitted to operate with numerous tents and chairs that were exactly like the set-up of the bar owner’s outdoor patio! Iowa’s government has engaged in similar decision-making. There is often no rhyme or reason for why a business may stay open and why a business must close. But what we do know, is that our government has not forced our large businesses to shut down.

Another problem is our federal government continues to favor big business over small business even when it tries to provide relief to ordinary folks. Our federal government provided incentives, handouts, and other pork in the CARES Act that continued to favor big business. Twenty-five percent of the initial $2 trillion (remember, those are your tax dollars) went to big business, with $58 billion going to the airlines alone and another $17 billion to the military-industrial complex giant, Boeing. Only $350 billion was earmarked for small businesses, and of that, $243 million “accidentally” went to large companies instead – leading some companies to return the money over the ensuing outrage. And recently we learned that businesses owned by President Trump and the Kushner family received $3.65 million in PPP loans intended for small business. All in all, only 5 percent of the first round of PPP loans reached small businesses.

What can we do? We must demand and advocate that our federal and state governments take care or our small businesses and ordinary Americans. Email and call your government leaders and representatives. They must act now. Before it is too late.

 

 

READ: 5 RECENT posts to check out ON franchising.

The Complete Introduction to Franchising and Franchise Ownership [With Updates] – Joel Libava, The Franchise King

Because if you’re going to invest in a franchise, it’s crucial for you to get a complete understanding of the business of franchising. You need to understand how the franchise business model works. Plus, you need to find out if franchise ownership is right for you.

Is Atlanta the U.S.’s new franchising Mecca? – Kieran McLoone, Deputy Editor Global Franchise

…not only is Atlanta now rife with franchise success stories and motivated entrepreneurs, but the capital city is home to some of the restaurant industry’s biggest brands’ headquarters and is frequently the location of choice for domestic expansion amidst all facets of U.S. franchising.

Issues in Franchising that affect Franchisees – Feldman & Feldman, P.C.

Purchasing a franchise has become one of the more popular business models in the United States – as well as globally – in recent years. According to research from Statista, in 2019 alone, the economic output of franchise establishments within the U.S. totaled roughly 787.5 billion dollars. With this in mind, it’s no wonder franchising is so popular; however, there are many caveats to becoming a franchisee that are often overlooked. Knowing how these drawbacks can affect unsuspecting franchisees can help them be better informed before entering into the franchise landscape.

Business Ownership: Deciding if Franchising is the Best Route for You – Seth Lederman, Forbes Councils Member

An entrepreneurial outlook doesn’t necessarily mean that you like to walk on the wild side; buck the system and be a trailblazer to go where no one has ever gone before. If you are a bit more reserved, want to own a business and maintain control, yet consider having your branding and marketing pre-established, a franchise might be the best course for your business-owning aspirations. You just have to maintain the course, engage with customers and reevaluate as things arise to be a successful franchise owner.

5 Reasons a Franchise Business is Even More Important Today – Jeff Bevis, Contributor to Forbes

Even in hard times, name brands have the upper hand when it comes to attracting customers. Franchise brands are known for consistency and quality, and that results in both national and local confidence in the product or service.

Successful franchisees know that while they have the support of a national brand, owning a business is hard work and demands a determined entrepreneurial spirit. Each franchise brand has different requirements but in general, to run a successful franchise you need strong organizational and communications skills, plus a willingness to learn the business. It’s also important to believe in and value the benefits of following a proven model and to embrace the existing system to guarantee the highest potential for success.

Stay Informed! Be sure to subscribe to this blog. We have exciting new resources planned for 2021!

Learn more about our franchise related legal services.

You have built a successful business and perhaps even have multiple business locations that are thriving. Out of the blue someone says, “You should franchise!” And the wheels start turning from there. You learn about the expected investment, hire a franchise attorney and complete your Franchise Disclosure Document (an over simplification for the purposes of this particular blog post ,but let’s go with it). Now you are ready to franchise. Even the most inexperienced franchisors know the success of a franchise depends upon the success of your franchisees. Of course it is tempting to take the first franchisee that comes along. After all, you have made a substantial investment and all of us would love to start with an easy sale.  Before you deposit that first check, however, keep in mind the advice the Grail Knight gave to Indiana Jones in the Last Crusade,

 Choose wisely, for while the true Grail will bring you life, the false Grail will take it from you.

Nothing could be closer to the truth when it comes to franchisors choosing franchisees. Underperforming franchisees require more support than strong franchisees. They also tend to complain and blame you for their ineffectiveness even when franchisees are responsible for their own failures. Sometimes they will even initiate litigation against you, or perhaps not pay their royalties and other fees. It may even result in a diminished reputation of your franchise when customers complain of poor service and other issues. These problems can definitely take the life out of a franchise business very quickly.

So how does a franchisor choose the right franchisee? Start off by considering these main points:

  • Can the franchisee afford the start=up expense?  Franchises can be expensive. Does the franchisee have sufficient capital not only to start the franchise, but also withstand the often difficult early months of the business.
  • Is the franchisee someone that needs to be in control? If so, franchising is probably NOT for that person. You definitely want franchisees who are willing to operate within the franchise system. Franchisees who want to operate outside of the norms of the franchise system will eventually hurt your system because they will not provide the consistent product or service your customers expect.
  • How does the franchisee feel about the ongoing costs?  Franchisees will generally pay fees totaling 5-10% of their monthly gross revenues in a franchise business. Have frank conversations with the prospective franchisee about why these fees are paid. If you sense they neither understand, nor value the reasons for such fees, you should pass on them as a franchisee.
  • Is the franchisee talking about doing it on their own? If a prospect is talking about doing the business on their own, then perhaps it is just best to wish them good luck and run from that person early on. In my experience, the business relationship with such prospects is rarely solid and usually does not stand the test of time.

I know it is tough to walk away from a sale, especially when you have invested a considerable sum invested in a franchise. But the early choices you make when selecting franchisees can often make or break a franchise.  Choose wisely to become successful.

How do you invest in a franchise successfully? The Franchise King, Joel Libava, has an excellent post with a Powerful 10-Step Checklist to Use Before you Buy the Franchise of Your Dreams. I love posts like the one Joel has written. His post has honest, straight-forward advice every person investing in a franchise should follow. The problem? So many investing in a franchise fail to do it.

The biggest piece of advice Joel touches on is “you have got to do the work.” Not only up front in your research but also as you move forward in the business. You would not believe how many times I have talked with people that essentially believe the franchise is going to do it all for you. Just know when you are investing in a franchise, the success of the operation falls squarely on your individual shoulders. No franchise can do it all for you. If it is to be, it is definitely up to you!

Another suggestion from Joel is to have 6 to 12 months of capital built up to survive during the start-up and lean times. You will have considerable expense in starting your franchise. But you need more than just the initial investment in order to be successful. The number one reason I see business people fail with franchises is that they are undercapitalized. The person may have just enough money to get in business, but do not have the funds for the long haul. Don’t be one of those people. Make sure you have enough capital to last through an initial ramp up period of several months.

Finally, Joel suggests seeing a franchise attorney. He suggests this EVEN IF there is no possibility the franchisor will negotiate the franchise agreement. Why?

So you have a complete understanding of the terms of the agreement, including what the franchisor is responsible for and what you are-as a franchisee. Plus, do you really want to pour over pages and pages of legal terms, some of which only a lawyer can understand?

In practice I have found that even those clients who could not negotiate their franchise agreement benefited from a review. It gave them a far better understanding of the business issues, and potential pain points. It also opened their minds to aspects of the business they had not considered previously. Plus, you are able to establish a relationship with an advisor who can likely help you on other aspects of the business such as forming a corporation or LLC, reviewing your lease, and help you draft employment policies and procedures.

Joel is one of the best in the franchise business. I highly recommend reading his post and reviewing his site. He has lots of good franchise investment advice and helpful tips.

2020 has been tough. And with the pandemic continuing, unfortunately it does not appear the challenges will end for franchise businesses any time soon. Governors around the country, including Iowa, are issuing new shutdown orders. What are key considerations for franchises as 2020 closes and we head into the new year:

  • Leadership. A couple of blog posts ago I talked about a franchisor that actually told its franchises that they were “on their own.” Franchisors need to show empathetic and encouraging leadership in the face of challenging times. A failure to exercise effective leadership will result in more franchisee closings, lost earnings, and upset franchisees. Franchisors and franchisees should continue to discuss best practices in order to improve and keep business profitable.
  • Keep Franchises Financially Viable. We know shutdowns mean decreased revenues for many franchises. Franchises must adapt in order for the business to remain viable as the rules change. As an example a primarily sit-down franchise restaurant may begin to emphasize take-out and delivery. Perhaps even a drive-thru, if possible, is now necessary to maintain a viable business. A business that routinely relies upon face-to-face meetings with clients and customers may need to find new ways to attract these customers to Zoom meetings or other methods.
  • Provide Relief to Franchisees. Franchisors may need to consider reduced ongoing fees and royalties in the short term in order to maintain the franchise long term. This may be difficult for franchises without significant cash reserves but giving some relief could go a long way toward keeping franchisees happy and operating.
  • Communication. Franchisors and franchisees need to improve communication during this tough period. Would you believe I have represented franchisees whose franchisors have not spoken to them once during the pandemic? Not a single email, phone call, or text. This is unacceptable. A lack of guidance and assurance from the franchisor will only give rise to feelings of isolation from and discontent toward a franchisor. Franchisors should have a carefully crafted plan to communicate with its franchisees during this difficult time period.
  • Messaging to Customers. Customers want to feel safe during the pandemic. There should be clear messaging that the franchise is operating within the health guidelines. This messaging requires coordination between the franchisor and franchisee. Effective messaging is critical to maintaining customer relationships that will not only survive the pandemic, but continue for years to come .

Set yourself up for better success during the pandemic by following these key considerations. If you need assistance during this difficult time period, whether you are a franchisor or franchisee, please take the initiative to contact us.

Multiple unit franchising has the most risk but offers the most reward. In my experience, owning multiple franchise units allows you to harness the true power of franchising. The franchisees I see who are the most successful are all multi-unit owners. Substantial investment is required in order to purchase multiple units 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 just results in buying yourself a job. So having the ability to scale your operations is critical if you hope to move past a single unit operation.

Scaling your operations is not easy though. And if you haven’t done it, it is best to find mentors and examples of business people that have been able to scale operations. I recently found an interesting example about a Jimmy John’s franchisee who scaled his operations to 59 locations. Most of the article focused on how the franchisee led and motivated employees. The former teacher has over a thousand employees!

There are also a few other things that stood out to me from the article about this franchisee:

  1. Follow the franchisor’s example. As the franchisee explained, he followed the franchisor’s example to become more successful. He created a Love, Hugs and Smiles position in his organization. This happened to be a long-time employee who had held almost every position in the organization. But the main role of this employee now is that he provides positive reinforcement to employees. This wasn’t a creation of the franchisee though. He readily admits that the Jimmy John’s franchise founder created the role and he just followed his successful lead.
  2. Create a transparent organization. The franchisee meets routinely each month with all his managers and most of his assistant managers. They discuss results, go over policy changes, any other changes that may be upcoming and any issues coming up with the franchisor. The managers are also encouraged to discuss how their doing, how their operating the business, and the struggles they are facing. Talking with the other managers enables the organization to challenge and support one another, and also learn from one another.
  3. Have an abundance attitude, not scarcity. One of the unique perspectives is that the franchisee actually believes that the more he pays to the franchisor, the more the business will take care of him. All too often, franchisees look at franchise fees in a negative way. It’s rare that a franchisee that approaches paying fees in a positive manner or looking at those fees as an investment. The franchisee also sets aside 25% of store profits for bonuses to managers if they meet their goals with food, labor and a couple of other key metrics. And there is no cap on bonuses! This insures that managers are aligned with the business to make it as successful as possible.

I encourage you to read the article to find some tips on how you can successfully scale your franchise operations.

 

This past week I had the opportunity to participate in the 43rd Annual Franchise Forum. As only one of two Iowa lawyers participating in this year’s Forum, it was an all virtual event for the first time in its history. The Forum is essentially the franchise lawyer bar association meeting. Every time I participate I love hearing the insights from other franchise lawyers across the country.

Again this year, I was reminded of the stark contrast and perspectives between predominantly franchisor lawyers and their predominantly franchisee counterparts. I practice in both segments quite often so I feel as though my ingrained biases don’t run quite as deep. And while my practice involves substantial work for franchisors these days, it did not take me long at this year’s forum to understand why franchisees and their lawyers become frustrated.

One franchisee lawyer shared his views on franchising during the pandemic. In his experience many franchisors have been willing to help franchisees by making certain concessions and providing some royalty and other relief. However, he also said that he had experienced a franchisor who simply told its franchisees, “you’re on your own!”

Imagine yourself as a franchisee in a franchise system that tells you you are on your own. That’s cannot be a good feeling. Most franchisees I know set out to buy a franchise because they are looking for a proven system, guidance and support when times get tough, and hopefully a business model that can stand the test of time. But it is a great lesson that I have talked about many times on this blog. Franchises are not all the same. There are good franchises and bad franchises. The key is to do your homework BEFORE you make the investment. Don’t assume a franchisor has a wonderful franchise system and business model just because it appears on certain lists and runs lots of advertisements. Dive deep into research. Conduct extensive interviews of the executives on your own. And interview franchisees.

I recently reached out to a franchise business on my own accord to see if it was a business I might want to purchase. It was a great exercise to go through the process myself. In the initial conversations the franchisor told a compelling story. However, as I continued my research, those initial positive thoughts began to diminish and I determined that it was not in my best interest to move forward as I learned more about the franchise system. It is OK not to move forward with a business opportunity. When you are investing your life savings  you better make sure it is the right opportunity for you. Franchise businesses do fail. Profits are not guaranteed. Set yourself up for a better chance of success by choosing a franchise that won’t tell you that “you are on your own.”

 

 

There are no little things.

Corporations and limited liability companies in the State of Iowa are required to appoint a registered agent and office within Iowa to receive service of process. We are able serve as your business entity’s Iowa designee to accept official documents on your behalf such as original notices for lawsuits and communications from various Iowa state agencies. If your business is a corporation or LLC, we also provide services to file your biennial report with the Iowa Secretary of State office.

You may see other organizations and businesses on the Internet that provide registered agent services. Many of those organizations are unable to provide you with legal advice and may not fully understand the implications of Iowa law. Our law firm is located in the State of Iowa and we provide these registered agent services for companies and franchises in the State of Iowa.

You can also serve as your own registered agent if you are an Iowa resident, but we have found that individuals often do not understand the consequences of a failure to respond within the applicable deadlines set forth in lawsuits and other communications served. It is best practice to have an attorney serve as the registered agent so that a professional familiar with responding to lawsuits and other communications has the opportunity to review such documents immediately rather than waiting until the 11th hour or until it is too late.

It is a small investment to protect your business. Amazingly, the registered agent is one of the  “little things” often overlooked by business people. A small fee for a business can prevent a huge headache. The lack of attention to filings and other important communications can have disastrous consequences for a business or franchise including a default judgment where monetary damages are entered against your company without the opportunity to defend a lawsuit filed against you. Unfortunately, I have seen it too many times to count.

So if you need a registered agent in Iowa, we can help.

 

Recently I reviewed a franchise offering for a prospective franchisee. This particular franchise made financial performance representations in Item 19 of the Franchise Disclosure Document (FDD). The financial performance representations revealed some impressive numbers at first glance. After all, the highest performing franchisee was earning in excess of million dollars per year. And the “average” franchisee revenue was nearly $700,000 per year. The problem? Only three franchisees in the system were earning the average revenue or greater. The rest of the franchisees were below the average revenue amount and the lowest had revenue of just over $100,000. The disparity between the franchisee earning the most and the franchisee earning the least was over $1 million per year. It was clear the top performing franchisees were propping up the revenue figures for the franchise system.

I much prefer franchises that deliver consistent success. While all franchise systems will generally have high performers and low performers, consistency of financial performance across all franchisees is a major factor in determining whether a new franchisee will have success. All too often I review franchise systems where far MORE than 50% of the franchisees are BELOW the average sales in the franchise. This means a small number of high performers skew the results and make the franchise system appear more successful. I know everyone wants to believe they are the best. But for purposes of reviewing FDD financial information, I suggest you concentrate on the averages. And not just average revenue itself. If the information is available in Item 19, concentrate on the number of franchisees that are hitting the average revenue. A low number of franchisees hitting the average is indicative of a franchise that is not delivering consistent results to franchisees.

The best franchises will deliver consistent results across the board. If you want to own your own business and dream big, I say more power to you. But don’t let those dreams color your expectations. Franchise businesses do fail. Profits are not guaranteed. Set yourself up for a better chance of success by choosing a franchise that is a consistent winner.

As a lawyer representing both franchisors and franchisees I have somewhat of an unique perspective on franchisor / franchisee relationships. Most franchise lawyers tend to represent one side or the other. But it is somewhat rare for a franchise lawyer to represent both sides. I have spent over two decades now reviewing franchise agreements. I started out representing primarily franchisees, but as my law practice evolved, I turned to representing franchisors in developing their franchise systems. I have always believed that franchisors need to care more about their franchisees.  Franchisors often need to do more than just get their franchisees in business. All too often I have seen franchisors fail to support and guide franchisees. Instead, many franchisors look to the franchisee as a revenue source and not much more.

A couple of instances lately have done nothing to change my mind and prompted me to write this blog post. First, I reviewed a franchise agreement that was not just one-sided, but could only be described as incredibly restrictive against the franchisee. If there was ever a protection created for a franchisor over a franchisee, this franchise agreement seemed to have it. From a franchisor legal perspective, it was no doubt written by an experienced franchisor lawyer who had painstakingly taken the time to protect the client in almost every respect. But from a practical perspective, the franchise agreement could spell doom for a potential franchisee and signaled to me a hardened approach that did not bode well for a franchisee.

The next instance involved my discussion with a new franchisor. He told me his story of how he actually started in business as a franchisee. He explained to me how his former franchisor “sold him a bill of goods” and had failed to support him in any way after starting his business. And to make matters worse the franchisor made no concessions to allow him to stay in business when the economy turned poor in 2008. So his vow is to create his own franchise system that will use “almost the exact opposite approach” of his former franchisor.

Does it have to be this way? Do franchisors need these overwhelmingly restrictive franchise agreements? Do franchisors have some obligation to support their franchisees and help them through the bad times? A couple of my new franchisor clients say their sole focus is developing franchise brands that are franchisee-centered businesses. As one new franchisor describes, “my financial success will come if my franchisees are successful.” And while that seems like a simply thought most franchisors should have, I can tell you in experience that is not a common mindset. Many franchisors from what I can tell do not really care all that much about franchisees. What they care most about is receiving a fee. They care about protecting themselves against defaulting franchisees. And they care about their own interests often to the detriment of franchisees.

What I am NOT suggesting is that franchisors should put franchisees first. Of course franchisors need to protect their businesses and systems. Of course franchisors should be concerned about their own profitability. What I am suggesting is that franchisors take a franchisee-centered approach. What does a franchisee-centered approach entail? To me, it means having empathy for franchisees. It means practicing attentiveness to franchisees’ questions and issues. It means communicating regularly with franchisees (which remarkably does not occur with many franchisors). It means developing effortless experiences with franchisees in terms of ease of doing business, training, and helping franchisees innovate their businesses. And finally, it means adding value for franchisees so you have created franchisees for life.

For many franchisors this may require a shift in mindset. A mindset that is not so rigid like your typical franchise agreement along with system rules, but instead that is more of a growth mindset where there is an emphasis on learning what works and does not work. And may require franchisors to listen much more to franchisees in order to improve in the future. Those are the types of franchisors I want to work with and I think it is the type of franchisor most franchisees want to associate with as well. And in the end, it is my strong belief that Franchisors who can take this franchisee-centered approach will set themselves apart to dominate the competition.