I had the opportunity to attend the Forum on Franchising in Baltimore this past month. The Forum Chair, Joseph Fittante, was recently interviewed by BlueMauMau on the state of franchise law which I thought was important to share.

Fittante commented that he is seeing more high stakes litigation. In his experience the number of litigation cases are decreasing but more of those cases are going longer than before. (That’s my experience as well by the way, so if you are a franchisee looking to end an agreement or recover damages, you can expect a strong fight from the franchisor).

Fittante also mentioned the significance of the KFC case decided by the Iowa Supreme Court. The Iowa Supreme Court ruled that a foreign corporation could be taxed on revenues received from the state of Iowa even though the company had no physical presence within the state of Iowa but rather received royalty revenues resulting from intangible property (i.e. the use of trademarks and licenses to franchisees) within the state. Fittante expects that more states will look to raise additional revenues through similar taxation methods or through the misclassification of franchisees as independent contractors v. employees.

Finally, Fittante also said he doesn’t believe we will see a federal franchise relationship law that governs the franchisor-franchisee relationship but that will continue to be controlled by state law. He has a point that it’s nice to know what the rules are rather than have ambiguity which happens when state laws vary so widely. 

Overall, I was impressed by the presentations at this year’s Forum. Hats off to Fittante and many others for their hard work!

A business owner needs to raise money. He comes up with an idea to "sell" a portion of his equtiy in the business. A prospective investor listens to the business owner’s pitch and likes the idea. He decides to invest nearly $20,000 in the business in exchange for ownership. The problem? Nothing is in writing, yet the investor has given the money, and there is nothing that documents whether the "investor" is entitled to ownership, whether it was a loan or perhaps even a gift.

I can’t tell you how many times I’ve seen something like that happen. It must happen to others as well because business advisor Mike Colwell recently wrote on a similar topic. It seems incredulous to me that someone could part with that kind of money without assurances in writing but I have seen it happen between friends and complete strangers alike. Why does this occur?

I think it boils down to trust. Most people are just too trusting. They believe things will work out and many don’t want to confront or offend the other person. Or, they’re just plain stupid (but I prefer the trust angle). So by all means trust your partner but make sure to get it in writing BEFORE you invest the money.

 

 

The last post touched on Franchising Your Business. To continue learning more about factors to consider in franchising your business, I highly recommend this post on the New York Franchise Law Blog called Franchising Your Business: What You Can Learn from Existing Franchisors.

One of the most important points from the post is the fact you need to have adequate capital to franchise. Bootstrapping your business may be vogue now but franchising isn’t something where that works. It takes significant capital to run an effective franchise operation – even if it’s low cost franchise offering.

Bottom line, you can’t do franchising half way. It will come back to bite you big time.

Lately we’ve heard from a number of business owners that are interested in franchising their businesses. It’s always exciting to talk with entrepreneurs who are enthusiastic about their business models. Franchising is an attractive option for many.

But there are lots of things to consider before you move down the path of franchising your business. First, you’ll need to understand the legal requirements to franchising a business. You’ll need a federal registered trademark and also comply with the Federal Trade Commission (FTC) disclosure requirements. As a part of your disclosure requirements, you’ll need to prepare a franchise disclosure document (FDD) which contains 23 specific iftems such as the background about the franchise business and its principals,franchise and other fees, whether you’ve been involved in litigation, estimated costs, an explanation for how territories are determined, the process for purchasing goods and services by franchisees and several other aspects. THe FDD also contains the franchise ageement and any other contracts the franchisee must sign.

Another thing to keep in mind is that you’ll need audited financial statements, and in certain states, you’ll need to register your franchise offering and renew it each year with the appropriate state agency. All of this takes time and costs a substantial sum of money.

There are many business considerations as well. Some questions a potential franchisor should ask themselves include, but are not limited to, the following:

  1. Are you making a good living in your business?
  2. Have you operated multiple locations?
  3. Do you have a proven system of operation?
  4. Are the profit margins large enough for the franchisee to make a good living, support employees and pay you a royalty?
  5. Do you have the time to devote to a franchise operation?
  6. Do you have the skill set to promote a franchise operation?
  7. )Do you have start-up and operating capital?
  8. Will franchisees be able to get financing from afforable sources?
  9. Does your business have a unique selling proposition?
  10. )Does success of the business depend on skills people have or can quickly acquire?
  11. Is the market stable enough to provide for growth over several years?
  12. Are you able to support franchisees once you get them in business and do you have something to offer them beyond getting them in business?
  13. Do you have a recognized brand name?

Franchising is not something to take lightly. It’s a major investment and dealing with franchisees, under the best of circumstances, can often be demanding. Do your homework, plan and conduct an honest assessment of your business before you take the plunge.

This past week I attended the ABA Franchise Forum in Baltimore for the fifth year in a row.  One of the traditions of the Forum is the annual presentation on Franchise and Distribution Law Developments. This year, Lee Plave and Stuart Hershman delivered an excellent presentation during which Iowa took center stage with the KFC decision discussed in my last blog post. Stu Hershman described it as perhaps the most significant franchise case of the year.

The presenters raised the question about whether franchisors should voluntarily disclose royalty revenues to the Iowa Department of Revenue in order to avoid penalties and interest. It will also be interesting to see how aggressive Iowa (and other states) will be in pursuing out-of-state franchisors for income and other tax purposes in light of the U. S. Supreme Court’s refusal to hear an appeal of the Iowa decision. No matter what the KFC decision is a case franchisors should not ignore.

On December 30, 2010, the Iowa Supreme Court ruled that a foreign corporation could be taxed on revenues received from the state of Iowa even though the company had no physical presence within the state of Iowa but rather received royalty revenues resulting from intangible property (i.e. the use of trademarks and licenses to franchisees) within the state.

KFC Corporation does not own stores within the state of Iowa. Alll stores are owned by independent franchisees. Further, the corporation has no employees within the state. But that didn’t matter to the state as a "physical presence" is not required and the state may impose a tax when:

Such part of the income of a non-resident is fairly attributable either to property located in the state or to events or transactions which, occuring there, are within the protection of the state and entitled to the numerous other benefits which it confers.

The U.S. Supreme Court recently refused to hear an appeal to overturn the decision.

An interesting post on the decision from the BlueMauMau blog is available here.

The full Iowa Supreme Court opinion can be read here.

 

One of the things I love the most is providing proactive educational workshops to companies and other organizations.  Due to the ever-growing interest in the topic, I am pleased to announce that I am now offering a new legal training workshop for businesses, large and small, regarding social media. A custom workshop will be designed for your business to cover the following topics:

  • Overview of Social Media, New Developments and the Future
  • The Use of Social Media in the recruiting and hiring process
  • Balancing Employee privacy v. Employer’s Business Interests
  • The risks and benefits of Employees using Social Media in the workplace
  • What every supervisor needs to know about the use of social media
  • How (or whether) to discipline employees for Social Media use
  • Social Media and its impact on Litigation
  • Social Media Train Wrecks
  • Summary of Social Media Case Law Developments 
  • Drafting the Social Media policy 

To tailor the presentation specifically for your organization, we will send you a questionnaire in advance regarding your organization’s and employees’ use of social media and your existing policies and procedures.  Every company is different and the presentation will be designed to address your organization’s specific issues, size, level of understanding and industry. Like other forms of employment based training, not only can social media legal training help you in the event you get pulled into litigation, but even more importantly, it can help prevent costly litigation and the loss of employee productivity.

Social media presents unprecedented opportunities and challenges for your business. It is essential that your executives, supervisors and employees stay informed about this ever-changing and important topic. For more information on social media legal training workshops and fees, please feel free to contact me at rush.nigut@brickgentrylaw.com.

 

Franchisees generally want an exclusive territory that is protected from encroachment by other franchisees or the franchisor’s company owned stores. Unfortunately franchisees are often under the mistaken belief they have an "exclusive territory" when they really don’t.

You must consider whether the franchisor has reserved rights that could cause encroachment or competition from the franchisor, other franchisees or even other companies the franchisor may acquire in the future.

Further, franchisors may have a Web site where it conducts online retailing but franchisees are not permitted to conduct online retailing themselves.  Do you really have an exclusive territory if the franchisor conducts sales online? If the franchisor’s online sales are significant, it could potentially divert customers away from the franchisee.

So don’t gloss over the territory provisions in the FDD or franchise agreement. If you are told that you have an exclusive territory when meeting with the franchisor’s representatives you better make sure that is actually the case.

Steve Sink has a post on IowaBiz entitled Using an appraiser to value the business. It’s a worthwhile read.

Steve brings up a good point that many buy/sell agreements are silent on the qualifications of appraisers. He writes that the qualifications of appraisal firms should be specified based on their size, the scope of their business, and perhaps, on their specific industry expertise.

Of course, business appraisals can be expensive. Consequently, I often advise clients to establish a formula for how they will value the business when we draft the buy/sell agreement. This approach not only lowers the expenses for the the buyer and seller upon sale but also provides greater certainty to the eventual purchase price.

 

I advise business owners to seek the advice of an accountant when they are forming a corporation – particuarly if they have multiple businesses. A recent post from accountant Joe Kristan on IowaBiz shows why as a Michigan couple ended up with a $16 million problem in Tax Court.

As the saying goes, "An ounce of prevention is worth a pound of cure."