This year I’ve reviewed so many franchise disclosure documents for prospective franchisees that I’ve lost count. No matter the industry, it seems as though I am always discussing the same things with franchisees, whether they are interested in fitness, restaurants, business services or tech. So here are 11 things I’d like every franchisee to know when they are considering a franchise opportunity:

  1. A franchise must have a strong brand or a great system (preferably both). Many prospective franchisees consider brands no one knows about. If so, that brand better have a product or system that knocks your socks off because you’re going to need to promote it just like you started up your own new independent business. Buying a well-known brand is usally better because the franchise name recognition is often so critical to success. Without a strong brand name or a great system, what are you buying?
  2. Be willing to walk away from the deal. In my experience, franchisees who are willing to walk away, get the best deals. They are the ones who get concessions in fees, territorial protections and other terms in the franchise agreement. It’s like buying a new car, if you’re willing to walk away, the sales person will usually stop you with a better offer.
  3. If it isn’t in writing, the franchisor isn’t going to do it. Many franchisees tell me that a franchisor told them ‘this’ or the franchisor told them ‘that’. If ‘this’ or ‘that’ isn’t in the franchise agreement, you can be rest assured the franchisor will not live up to their end of the bargain. You can take that to the bank. 
  4. Trademark indemnification is necessary. Are you really going to invest your life savings in an opportunity when the franchisor won’t even stand by their brand and trademark by defending you if someone sues you for using the FRANCHISOR’s trademark? In my opinion franchisors should be legally required to defend franchisees for the use of the franchisor’s trademark. After all, the marks are the heart of the franchise. Most franchisors I’ve dealt with will make this concession in their franchise agreement but it still amazes me when it’s not addressed up front in a franchise agreement.
  5. Determine if franchising is right for you up front. Some people are not rule followers. These people will not make good franchisees. If you want to chart your own course with a business, don’t become a franchisee.
  6. Interview as many current and former franchisees as possible. If you aren’t willing to take the time to call current and former franchisees, you probably get what you deserve if the franchise opportunity goes wrong.
  7. Avoid personal guarantees for your spouse. Most franchisors will require a personal guarantee from you. However, there is no reason to throw all your eggs in one basket by having your spouse sign a personal guarantee too.
  8. Bargain with new franchisors. I am leery of people investing their life savings in a new franchisor but I realize it is sometimes a great opportunity to get on the ground floor of a franchise. But remember that most new franchisors NEED to sell franchisees. This means you may have greater bargaining power to get a better deal.
  9. Franchise agreements are negotiable. Franchise agreements are negotiable even if the franchisor says they’re not. Do not be afraid to negotiate. A franchisor that gets upset with you because you try to negotiate is not the right franchisor for you. It’s not personal, it’s just business.
  10. Mutliple Unit Franchising has the most risk but offers the most reward. In my view, owning multiple units allows you to harness the true power of franchising. The franchisees I see who are the most successful are all multi-unit owners. However, this usually requires a substantial investment 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 you are just buying yourself a job.
  11. Franchise businesses fail at roughly the same rate as other businesses. Over the past few years I’ve seen many franchisees you could not make it for one reason or another. Don’t fall for the trap that franchise businesses are less likely to fail. It couldn’t be further from the truth.

Don’t trust your franchise selection to luck. Do your homework and carefully consider all your options before making a substantial investment in a franchise.

Franchise Times recently published its Top 200 systems issue in a story by Jonathan Maze. The big takeaway for me is that franchising is on an upswing after experiencing no growth during much of the recent recession. But franchising has returned as a bright spot in the economy according to the article.

Restaurants appear to be the big winner in my review of the list. It also appears as though fitness franchises are experiencing impressive percentage growth numbers. But don’t mistake growth for profitability though, I’ve seen a number of fitness franchisees have trouble with profitability over the last few years, including some from fitness franchises on the list.

The success of McDonald’s is pretty remarkable according to the statistics. Maze points out in the last six years McDonald’s added more revenue that KFC sees in total for an entire year.

For a complete list of the franchises on the Top 200 list click here.

I also wonder what my friend The Franchise King would say about the value in these lists when researching franchise opportunities?

I read with interest about Startup Iowa, a new initiative to provide resources and visibility to Iowa’s entrepreneurs. Startup Iowa joins the Startup America Partnership as the eighth region in the nation. Where will it go from here? I think the sky is limited for startups and entrepreneurs in Iowa. Of course, I’m biased. My new company, NotifyWorks, is one of those startups located here.

The momentum is building for entrepreneurs in Iowa. It’s absolutely great to see and it’s been a long time coming. Need further evidence? Des Moines recently ranked third in Marketwatch’s survey for the best cities in the country for business.

Let’s keep it building here in Iowa. And if your startup needs to set up an LLC or corporation, please check out my small business package for more information. It’s a flat fee service that’s designed to provide startup friendly pricing.

 

 

Prospective franchisees should read a new book from The Franchise King, Joel Libava, called Become a Franchise Owner: The Startup-Guide to Lowering Risk, Making Money, and Owning What You Do.

I don’t make that recommendation lightly. But Joel and I share a common passion. We are both passionate about making sure that franchisees investigate and research franchises carefully. All too often people invest their life savings in a franchise only to find out that the franchise wasn’t for them. While proper due diligence and investigation doesn’t guarantee success, it definitely gives you a better chance!

Joel’s book is straight-forward and full of practical tips in researching franchise opportunities. He says that most people start off their franchise research by making two mistakes:

  1. Going it alone without anyone experienced in franchising to assist them;
  2. Starting the search by searching for a franchise. You’ve got to determine if franchise ownership is right for you first.

Now I must disclose that Joel included a short piece I wrote for the book on my thoughts in reviewing the franchise disclosure document and franchise agreement. After reading the entire book, I am even more flattered that he asked me to write the piece because I believe his book is the best I’ve read on the steps franchisees need to take in order to properly research franchising and how best to lower risk in the process.  It’s a small investment ($8.99 for the Kindle version and $14.63 for the hard cover) but could save you big bucks down the road. If you’re thinking about researching a franchise, my hope for you is that you read this book before starting. And if you’ve started, stop now and read this book before it’s too late.

Over the last 5 years that I have been writing this blog, there haven’t been many Iowa business lawyers who write a blog on a regular basis. But when I was looking at Mike Colwell’s Startup Models site, I noticed a new blog from business lawyer Chris Sackett of Brown Winick called BizB4Law.

Chris wrote a post I wish I had written called I Like Clients Who Don’t Like Lawyers.  Chris says,

This post, of course, runs the risk of offending lawyers, but I suppose the whole premise is that lawyers need to get over themselves and think like the business people who are their clients.

Well said. It’s a super post. Check it out.

If you’re working on a business plan or financial model for your startup business, be sure to check out Startup Models too. It could save you a lot of time, expense and effort.

As I said in my previous post on LLCs, the limited liability company (LLC) has become the entity of choice for the majority of new business owners. In Iowa, there are approximately twice as many filings for LLCs each year than there are for corporations. But I still have a special place in my heart for the good ‘ole corporation and I still counsel many business owners that a corporation is the right entity for them.  In particular, many small business owners file what is known as the S Corporation. The S corporation is attractive to many small business owners because it is a "pass-through" entity where all the profits of the corporation flow through to the owners, enabling them to avoid the possible "double taxation" issues of C corporations. The owners may also be able to save on self-employment taxes with the S corporation but must be careful to set a "reasonable salary" to avoid issues with the IRS.

The owners of corporations are called shareholders or stockholders and ownership is evidenced by share or stock certificates. Like LLCs, the filing and ongoing fees for corporations in Iowa are reasonable compared to many other states. Here is an outline of the steps you need to follow in order to form a corporation in Iowa:

1. Find out the availability of your proposed business /corporation name. You can do a quick search on the Iowa Secretary of State Web site to see whether your name is available. If you enter the name of your proposed business and it doesn’t appear, chances are very likely you’ll be able to register that name in Iowa.  If the name is available you may want to reserve the name through the Secretary of State but you are not required to do so before forming your business entity. You should consider whether any company outside Iowa has your business name. You can conduct a free search on the U.S Patent and Trademark Web site or use a paid service to research trademarks nationwide. It is also a good idea to check whether someone has your proposed Internet domain name.  An Iowa intellectual property attorney could also be very helpful in this process.

2. Pick a Place to Form Your Corporation. I am sometimes asked whether an Iowa company should form a corporation in another state such as Delaware or Nevada. In general, an Iowa small business is probably better off incorporating or forming an LLC here in Iowa. The filing fees are low ($50.00) and the ongoing fees for registering the business in Iowa are among the lowest in the country. (Only $30.00 every two years if you file your biennial report online).

3. Choose the Shareholders. If you are forming a corporation who will be the shareholders in the corporation?  These are the owners of the corporation.  Determine how much capital you will need. Do you have enough capital or access to capital in order to start the business on your own? If not you may need to consider other investors.

In many cases the shareholders of the business are also the directors. You may consider whether you want or need outside directors? There may be good reasons to have outside directors but think this over carefully before you elect to do so.  Electing to have outside directors may limit your control over the business.

3. Create your Articles of Incorporation. The articles of incorporation act as a charter to start your new business in Iowa. The filing fee with the Secretary of State is currently $50.00. It is generally a good idea to have an Iowa business lawyer prepare your articles of incorporation and associated company documents. Online document filing companies cannot provide you with legal advice.

4. Prepare your Corporate Bylaws. The bylaws of the corporation set out the operating standards and procedures the busines will follow.

5.Create meeting minutes, resolutions and agreements. It is a good idea to document the initial meeting minutes of the corporation including the meeting of the shareholders and directors. At this time, you will elect the officers of the corporation including the president, vice-president, secretary and treasurer. You may also issue share or stock certificates at this stage. If you have multiple shareholders you will also likely need a buy-sell agreement.

6. Obtain your employer identification number (EIN). Your corporation will need to obtain an employer identification number from the IRS. This can be done through a convenient online application process.

7. Elect your tax status.  There are different options for how your corporation could be taxed. Make sure to talk with both your accountant and lawyer about which form of business entity is the most advantageous for your situation.

8. Open a bank account. You will typically need the EIN and a banking resolution in order to do this.

9. Obtain any licenses and permits. You will need to check the federal, state and local regulations to determine whether you need and licenses or permits to operate your business.

10. Follow the corporate formalities of running a business. In Iowa, this includes registering your corporation by filing a biennial report every two years with the Secretary of State’s office. You may also draft corporate minutes at least on an annual basis in order to elect your officers and directors. It’s best to sign all documentation using your title as a corporate officer so that others will know you are operating with a corporation rather than as a sole proprietorship.

For more information on forming an Iowa corporation, please click the following link for my Small Business Formation Package.

Over the last several years, the limited liability company (LLC) has become the entity of choice for the majority of new business owners. In Iowa, there are approximately twice as many filings for the LLC each year than there are for corporations. People tend to like the flexibility afforded by the LLC. With an LLC, you receive the limited liability protection of a corporation and plus the flexibility of being taxed as partnership, corporation or sole proprietorship depending on your needs. Further, if you are forming a sole member LLC, you can choose to become a "disregarded entity" which means you are not required to file a separate tax return for your business which can save you accounting costs each year.

The owners of LLCs are called members and ownership is evidenced by "membership units". In Iowa, the filing and ongoing fees are reasonable compared to many other states. Here is an outline of the steps you need to follow in order to form an LLC in Iowa:

1. Find out the availability of your proposed business /LLC name. You can do a quick search on the Iowa Secretary of State Web site to see whether your name is available. If you enter the name of your proposed business and it doesn’t appear, chances are very likely you’ll be able to register that name in Iowa.  If the name is available you may want to reserve the name through the Secretary of State but you are not required to do so before forming your business entity. You should consider whether any company outside Iowa has your business name. You can conduct a free search on the U.S Patent and Trademark Web site or use a paid service to research trademarks nationwide. It is also a good idea to check whether someone has your proposed Internet domain name.  An Iowa intellectual property attorney could also be very helpful in this process.

2. Pick a Place to Form Your Limited Liability Company (LLC). I am sometimes asked whether an Iowa company should form an LLC in another state such as Delaware or Nevada. In general, an Iowa small business is probably better off incorporating or forming an LLC here in Iowa. The filing fees are low ($50.00) and the ongoing fees for registering the business in Iowa are among the lowest in the country. (Only $30.00 every two years if you file your biennial report online).

3. Choose the Members. If you are forming an LLC who will be the members in the company?  These are the owners of the company.  Determine how much capital you will need. Do you have enough capital or access to capital in order to start the business on your own? If not you may need to consider other investors.

In many cases the members of the small business are also the managers. You may consider whether you want or need an outside manager? There may be good reasons to have outside manager but think this over carefully before you elect to do so.  Electing to have an outside manager may limit your control over the business.

3. Create your Certificate of Organization. The certificate of organization for an LLC act as a charter to start your new business in Iowa. The filing fee with the Secretary of State is currently $50.00. It is generally a good idea to have an Iowa business lawyer prepare your certificate of organization and associated company documents. The LLC laws in Iowa changed in 2009 and frankly many document filing companies on the Internet may not be fully aware of all the changes in the Iowa law.

4. Prepare your LLC operating agreement. The operating agreement of the LLC set out the operating standards and procedures the business company will follow.

5.Create meeting minutes, resolutions and agreements. It is a good idea to document the initial meeting minutes of the company including the meeting of the members. At this time, you will elect the officers of the company including the president, vice-president, secretary and treasurer. You may also issue membership certificates at this stage. If you have multiple members you will also likely need a buy-sell agreement.

6. Obtain your employer identification number (EIN). Your LLC will need to obtain an employer identification number from the IRS. This can be done through a convenient online application process.

7. Elect your tax status.  There are several different options for how your LLC could be taxed.  Make sure to talk with both your accountant and lawyer about which form of business entity is the most advantageous for your situation.

8. Open a bank account. You will typically need the EIN and a banking resolution in order to do this.

9. Obtain any licenses and permits. You will need to check the federal, state and local regulations to determine whether you need and licenses or permits to operate your business.

10. Follow the corporate formalities of running a business. In Iowa, this includes registering your LLC by filing a biennial report every two years with the Secretary of State’s office. You may also draft company minutes at least on an annual basis but with an LLC in Iowa you are not required to do so. It’s best to sign all documentation using your title as a company officer or designating your signature as "member" so that others will know you are operating with LLC rather than as a sole proprietorship.

An Iowa LLC is for business owners that want a separate business entity for limited liability protection, but with fewer formalities than a corporation. You can also choose between pass-through or corporate taxation, as well as the ability to allocate profits and losses in differing proportions than ownership interests.

For more information on forming an Iowa LLC, please click the following link for my Small Business Formation Package.

In my experience, wage and hour issues are often misunderstood by employers. Employers often treat employees as "exempt" in order to avoid paying the overtime owed to "non-exempt" employees. As a plaintiff’s attorney said in one of my previous blog posts on the subject:

"I can hit a company with a hundred sexual harassment lawsuits, and it will not inflict anywhere near the damage that [a wage and hour suit] will."

A post from the California Injury Attorneys Blog discusses a recent settlement in which Oracle ageed to pay $35 million for employee wage and hour misclassification. As discussed in the post wage and hour misclassification cases often are class actions which result in large sums paid by Defendant employers.

For more information see my tips for avoiding wage and hour lawsuits.

Many advertisements from document filing companies on the Internet tout the benefits of forming a corporation.  The first benefit typically mentioned is that a corporation provides"limited liability" or "asset protection".  Many of these companies would have you believe that if you form your own company for $99.00 you can magically protect your assets from creditors.  But asset protection is more than that.  It is true that limited liability is a major reason for incorporting your business.  The issue not addressed in these advertisement is that filing your articles of incorporation is only the very beginning in protecting your assets.

The basic concept of incorporating is that a creditor will not get to the shareholder’s assets unless there is a reason to "pierce the corporate veil".  One reason for piercing the corporate veil is the failure to follow corporate formalities.  This may include the failure to hold shareholder and director meetings, documenting those meetings with corporate minutes, segregating corporate funds from personal funds and the failure to sign documents as a corporate officer.  Managing your small business corporate governance is a key factor in maintaining your corporate limited liability.

For more information see my legal checklist for starting a business in Iowa or the small business formation page.