You can catch me tonight on the Insight on Business – The News Hour with Michael Libbie this evening at 5 pm on AM 1350-KRNT.
Michael and I will be talking franchise law and more.
It’s a great program you should check out. The show runs Monday-Friday each week at 5 PM.
Prospective franchisees are often under the mistaken belief that franchise agreements are not negotiable. That’s often true even after a franchisor says initially that it will not negotiate a franchise agreement.
So what’s one key in obtaining concessions in your franchise agreement?
Be willing to walk away.
It’s true of any negotiation. If you are willing to walk away empty handed, you are often much more likely to get a better deal. You are probably in the strongest negotiating position when you don’t care whether you become a franchisee or not. However, it is rare that a prospective franchisee takes this position. Usually the the prospective franchisee wants the deal and the franchisor knows it. Without the sense that you are willing to walk away, a franchisor has little incentive to concede on issues in the franchise agreement.
Franchise agreements are generally far too one-sided. Some concessions are generally in order. Don’t make the mistake of going blindly into franchise ownership. Get legal representation from an experienced franchise lawyer and understand the provisions of the agreement. And if the franchisor isn’t willing to work with you on language in the agreement, perhaps it isn’t the right franchisor for you. Demonstrating that you’re willing to walk away from the deal can be a very powerful negotiation technique under the right circumstances. Of course, you must be willing to do just that with an understanding that maybe it just wasn’t the right deal. In my experience it’s the rare person that can do this. But perhaps it helps illustrate why most businesses (even franchise businesses) fail.
If you’re a prospective franchise I highly recommend a series of articles written by Robert Purvin, Chairman and CEO of the American Association of Franchisees and Dealers, on franchising myths. One of his best articles touches on the myth that Franchising Provides a "Proven Franchise Business System".
I hear this one all the time. For some reason prospective franchisees automatically assume that because a business has franchised it has a system in place that will lead to profitability. Sadly, this just isn’t always the case.
Franchise businesses fail at roughly the same rate as independent businesses. If you are considering a franchise business, be sure to do your homework. Visit franchise locations, talk to as many franchisees as possible and carefully consider whether purchasing a franchise business (which usually includes higher initial fees and costs) is better than starting your own independent business. Often, you will find with many franchise businesses that the system is far from "proven".
I am speaking at the Iowa Bar Association’s Bridge the Gap seminar on May 9, 2013 on The Lessons I’ve Learned From Seven Years of Legal Blogging.
I am excited about the presentation as it is the first time I’ve spoken on legal blogging for a couple of years. I’ve given numerous presentations about social media and the law over the past several years but at the end of the day it’s fun to discuss why lawyers should blog and how it can be done effectively.
I’d also suggest watching this short video on Law Firm Social Media Strategy from the LXBN Network. The video has a couple of excellent tips for lawyers to remember when using social media.
Joel Libava (a/k/a "The Franchise King") has a list of 20 Must-Do Things Before You Buy a Franchise. It’s a great list so I thought I’d share the article with you.
The last item on his list is to "Lawyer Up". Joel explains that the franchisor has a lawyer so franchisees should too. He also says to find a franchise lawyer rather than just any business lawyer. Both are excellent pieces of advice.
My experience is that often prospective franchisees are reluctant to hire a lawyer because they don’t believe the franchise agreement can be negotiated. This isn’t always the case. I’ve worked with a number of franchisors who are willing to negotiate certain terms in their franchise agreements. Additionally, it’s important to understand what certain provisions mean. For example, you may believe you have a "fully protected territory", yet the franchise agreement may have provisions that limit this territorial protection. If you are investing a substantial amount of your life savings, isn’t it worth a legal review to understand exactly what it is you’re buying?
But most of all I like how Joel has set out a step-by-step plan for someone to explore franchise ownership. It’s not for everyone. Franchise operations fail at roughly the same rate as independent businesses. So it’s critically important to look inside yourself, examine your finances carefully and choose a franchise that fits within your talents and financial means should you decide to pursue franchise ownership.
Those interested in raising investment capital for their business, or those interested in making investments in businesses, may want to take advantage of the monthly due diligence/investor training provided by Plains Angels.
Plains Angels is a group of Midwest angel investors that have now funded various projects here in the Midwest. The group is actively taking applications for companies seeking investment money and it appears the quality of the companies being considered is improving each month.
This month’s due diligence session covers Classes of Stock and Corporate Structure. The presenters will discuss various rights offered to preferred shareholders and the impact of those rights over the long term, including liquidation preferences, preferred distributions, management rights, and the tax consequences of those rights for different entity types. The presentation will also discuss the impact of future capital raises on the angel investors depending on their rights.
This training session will be held Thursday, April 25, 2013 from 8:30 a.m. – 11:00 a.m. at the Greater Des Moines Partnership, 700 Locust Street in Downtown Des Moines. You can check out the schedule of events at https://tikly.co/plainsangels. Tickets cost $15.00 for each session.
I recommend prospective franchisees take a look at Empire Builders which is a series of videos highlighting successful multi-unit franchisees.
Most of the prospective franchisees that come to see me are seeking to purchase a single franchise. Many of them dream of becoming a multi-unit owners but usually lack the capital (at least initially) to make that a reality. It’s interesting to hear from multi-unit owners who have been able to harness the power of the franchising model and achieve great success. It is easier said than done.
There are some great videos in the series covering topics such as:
Potential franchisees should read this article from Robert Purvin on Franchising Myth One: Franchises are Safe Investments. In the article, Purvin discusses how franchises and independent businesses fail at roughly the same rate (something discussed at length in several of my blog posts).
It’s critical that prospective franchisees understand that buying a franchise will not automatically increase your chances of success. I hear time and time again from people about how franchises have a "system" and "they will help me with marketing and getting customers". It’s not always the case.
Purvin gives some good advice to help avoid mistakes when deciding whether to buy a franchise operation:
When you and your franchise attorney are reviewing the Franchise Disclosure Document, don’t limit your investigation to the closure rates. Look at the profitability of each location, especially those that serve in markets similar to yours. Do your due diligence and speak with current and past franchisees. Ask them direct questions about their profitability. It is especially critical to talk to past franchise owners and to ask them why they left the franchise. If you get any sense that the franchisees had trouble making a profit, then think very carefully before moving ahead.
Most importantly, insist that your prospective franchisor provide you with sufficient data to evaluate the profitability of the business. Limit your search to franchisors that make financial performance representations (formerly called ‘earnings claims’). There are many franchise opportunities available that are able to authentically boast high rates of success and profitability. These tend to be the top tier franchisors that require the highest investments and strictly limit their franchisee pool. As you go down the rungs of the franchising ladder to less well-known brands, new franchisors, and those with very low rates of entry, the risks typically grow.
Understanding that buying a franchise, just like starting any business, carries significant risk is the first step. You could lose your money. I see it happen to franchisees frequently. Be sure to approach buying a franchise just like it was your very own. Because in the end it will be up to you, not the system, to make it successful.
If you read article after article on business law you will see "Get it in Writing" near the top of the list in advice that lawyers routinely dispense to business owners. Indeed, a quick search of this blog produced 28 entries dealing with "getting it in writing".
My experience is that many business owners would love to get their agreements in writing but they are often frightened about the cost. Some business owners will resort to self-help services but there’s no substitute for a experienced business lawyer writing your agreement(s). (Self-serving but true).
So how do you effectively get a written agreement completed with the help of a lawyer? Here are a few tips:
These are just a few simple tips. The key is to communicate with the lawyer. Remember it’s your agreement. A good business lawyer will do his or her best to find the balance between protecting you and getting the deal done.
* This is a guest post from Jessica Susie of the Brick Gentry Law Firm. Jessica is a registered patent attorney.
The America Invents Act, which President Obama signed into law on September 16, 2011, has been gradually overhauling the United States patent system. March 16, 2013 marked the biggest change – the United States switched from a first-to-invent to a first-inventor-to-file system. Subject to some limited exceptions, the first-inventor-to-file his patent application will be entitled to patent protection, even against an earlier inventor who later files. With the switch, the requirements for patentability have also been revised. Inventions still must be novel, nonobvious, and useful to secure patent protection. However, the definitions of what constitutes a “novel” and “nonobvious” invention are now different. In particular, the one year statutory bar, also called the grace period and on-sale bar, has changed.
Previously, an inventor had a one year grace period after disclosure of an invention in which to file his application. Disclosures included printed publications in the United States and foreign countries, public use in the United States, and sales or offers for sale in the United States. Importantly, it did not matter who made these disclosures. In practice, most businesses associated the statutory bar with their own actions – one year from putting a product on the market or publishing a journal article, the application was due. However, what many businesses and inventors may not have realized, is that the one year grace period also affected the prior art used by the United States Patent and Trademark Office (USPTO). “Prior art” is a term used in patent law to describe information that has been made available to the public and that is relevant to a particular application. It may include previous patent applications and patents, journal articles, books, and event websites. In most situations, the USPTO examined applications using prior art references dated earlier than one year prior to an application’s filing date.
However, the new one year grace period only applies to certain disclosures, namely those that originate with an inventor. The one year grace period applies if (1) the disclosure was made by an inventor or a third party who obtained the subject matter from an inventor or (2) the disclosure, although not traceable to an inventor, was made after a disclosure by an inventor or a third party who obtained the subject matter from the inventor. The policy behind these rules is the hope that they will promote early disclosure of inventions to the public, which will increase innovation in the United States.
So, what does this mean for businesses going forward?
