In his monthly newsletter, Joe Cooney of Frannet points out the categories and questions you should ask franchisors to provide a starting point in your due diligence process.  Those categories and questions include:

1.  Competitive Advantage of Product or Service

How is your system better than others?  Who are your competitors?  How does your business match up?  Who are your suppliers?  What are the prices of your products?  Are your products priced fairly?  Are there any restrictions with regard to products and services?

2.  Time Tested, Standardized Franchise System

How long have you been franchising?  How many franchise units do you operate?  How many units have you closed in the last three years?  How many units have been transferred or sold in the last three years?  How many units do you plan to open over the next three years?  What is the initial investment and what do we get for that?  What are your fees?  What earnings claims do you make?  What improvements have you made to your system recently?

3.  Strong Franchisor Support

How do you support franchisees?  What is the initial training process?  What support do you provide after the franchise is up and running?  What will I hear from franchisees on this subject?

4.  Financial Strength and Management Experience

Describe in layman’s terms the financial strength of the franchise system.  How much revenue comes from initial fees and how much from royalties?  Is the franchise publicly traded and how has it performed?

5.  Mutual Interest of Franchisor and Franchisee

How will franchisees describe their relationship with the franchisor?  Supportive?  Combative?  Have there been any lawsuits or abritration proceedings?  What was the issue and how did it end?

Remember this is only a start for the due diligence process.  You should be sure to interview as many franchisees as possible in order to better understand the franchisor and its system. 

Frannet is also offering free webinars on franchise opportunities in specific industries.  If you have any questions about the webinars you can email Joe Cooney at jcooney@frannet.com. 

Most people have heard of "buyer beware" but anyone selling their business would be wise to think "seller beware".  When someone decides to sell their business they naturally want to find a buyer as quickly as possible for the highest possible price.  But business owners and advisors should take care to avoid litigation traps in selling a business.

1.  Conduct due diligence on the buyer.  Is the buyer adequately financed?  Even if the buyer is able to obtain a loan will the buyer have sufficient operating capital to run the business?  Moreover, does the buyer have an aptitude for the business?  If not, the buyer is less likely to succeed and an unhappy buyer is more likely to file a lawsuit.

Check out the buyer’s litigation history, judgments and credit history.  A buyer will almost always obtain tax returns from a seller but a seller should also consider obtaining financial information from the buyer.

2. Do not divulge trade secrets and confidential business information without a signed confidentiality agreement.  The theft of trade secrets is an increasingly litigated issue.  In the business sale context this often happens when negotiations break down and the potential buyer decides they can start their own business.  It is important for the confidentiality agreement to include the right to obtain an injunction, damages and attorneys fees in the event of a breach.

3.  Avoid signing ambiguous letters of intent.  Some letters of intent are binding and others are not.  Be sure to have counsel review any letter of intent to make sure it protects your interests.

4.  Do not make inaccurate representations and warranties.  Sellers often do not carefully consider the representations and warranties they make in the purchase agreement.  There are significant risks in making false or negligent representations and warranties.

5.  Failure to adequately document the disclosure of adverse material facts.  Often a seller will divulge to the buyer adverse material facts that impact the business.  After doing so the deal closes despite the bad news.  Imagine the frustration then when the buyer sues the seller for breach of warranties and representations, fraud and breach of contract claiming that the seller never told the buyer about the problems.  At a minimum, a seller should have the buyer acknowledge receipt of the adverse material facts during the due diligence phase.  By doing so the seller can protect against claims down the road that the buyer was never told about problems with the business.

6.  Do not draft your own purchase agreement or rely upon a business broker’s form agreement.  In my experience the only person protected by a broker’s form agreement is the broker.  The broker will often tell a seller that a lawyer will only slow up the process and add expense.  The broker has only one thing on their mind – the commission.  Make sure you talk with a lawyer experienced in business sale transactions when drafting the contract.  Sure, it does add some expense but it will likely pay off down the road.  A well-drafted contract can help you avoid litigation completely or it will provide better protection if and when litigation does occur. 

Source:  Thanks to Pennsylvania business lawyer Anthony Cerminaro for his post on the topic.

North Carolina business litigation attorney, Thomas Kerner, has an excellent post about the rise in business to business contract litigation.  Kerner says this is happening for two main reasons.  First, many businesses do not use lawyers to draft their contracts.  Second, many businesses often rely on form contracts that are outdated.

Kerner provides some terrific advice:

Make sure your contracts and business practices are as up to date as possible; if your contracts with customers, vendors, suppliers, distributors and everyone else you do business with aren’t up to date with the latest developments in business and contract law, you could be staring at one of these "bet the company cases".

He also provides a link to an interesting article on the huge rise in business to business litigation.

Here is an interesting tidbit presented by the California Estate and Business Law Blog.

According to Turbotax the S Corporation has the lowest risk of audit for the various business entities.  Those audit risk percentages are:

S corporations   .19%

Partnerships     .26%

C Corporations    .71%

Sole Proprietorships     2.13%

But if you play by the rules it really should not matter which business entity you use.

Update on December 1, 2006:  See this article from Inc. Magazine which I spotted on the New York Small Business Law blog (thanks Imke) concerning the rise in S corporation audits.  Again, play by the rules and it won’t matter.

Last week was a momentous week as Brett Trout and I concluded the first ever full-day CLE devoted to lawyer blogging in the country through LAWpportunities.  We were fortunate to have been joined by blogging experts Mike Sansone and Sandy Renshaw.  Mike delighted the crowd with his tutorial on RSS feeds.  Any lawyer not using RSS feeds in their law practice is missing out.  If you are a lawyer interested in harnessing the power of RSS feeds you may want to check out the Iowa State Bar Association eCommerce seminar on December 1st where I will be talking about how RSS feeds may gain you a client for life. 

Prior to their appearance at our blogging seminar, Mike and Sandy joined several other Iowa bloggers (Drew, Tim, Mike, Tom, Mitch, Doug and Brooke) in welcoming Starbucker to Iowa Blogging Central (aka Panera U in West Des Moines).  Now Sansone is probably the biggest Panera fan I know and Starbucker obviously has a certain affinity for a cup of latte now and then.  But fellas your favorites could use a little help.

First, Starbucks reported earlier this month that it had lost the personal data of 60,000 employees and contractors when two laptops turned up missing.  It is bad enough that the personal data included names, addresses and social security numbers but that is only part of the story.  The rest of story is that the laptops were missing from . . . a closet!  Who stores computers containing confidential information in a closet?  (Well, I guess Starbucks actually).  Anyway, after a two month investigation did not turn up the laptops Starbucks has offered the employees and contractors free credit protection to guard against identity theft.  Also, Starbucks already implemented a policy whereby confidential information such as social security numbers are not allowed on laptops and other mobile devices but these laptops unfortunately contained the information before the policy was in place.  No word on whether Starbucks has implemented a policy prohibiting the storage of laptops in closets.

Second, Panera had its own little legal blunder.  Panera had the exclusive right to sell sandwiches in a Massachusetts mall.  The owner of the mall then signed a lease with Qdoba Mexican Grill.  Panera sued to enforce the exclusivity portion of their lease.  The court ruled that a burrito is not a sandwich.  The decision came down to the difference between two slices of bread versus one tortilla.  The judge also concluded that a sandwich is not commonly understood to include burritos, tacos and quesadillas which are typically made of a single tortilla stuffed with a choice of meat, rice and beans.  (No wonder the guys at Pancheros looked at me a little funny when I ordered a sandwich with steak, rice, beans, cheese and salsa on tortilla.  I guess the judge was right).

Only in America!

 

As evidenced by a recent study from Iowa Association of Business and Industry, Iowa companies are concerned about the legal climate in Iowa. 

Here are five ways to avoid lawsuits against your business:

1.  Use written agreements.  Unfortunately the day is over when you could rely on a handshake.  Make sure that your agreements are comprehensive.  The agreements should always set forth the rights and responsibilities of the parties in detail.  It is a good idea to have your written agreements drafted and/or reviewed by a business attorney.

2.  Have a comprehensive employee manual.  Employee lawsuits are on the rise and a major distraction for your business.  A written employee handbook affords you a better opportunity to avoid misunderstandings that can lead to litigation.  Disputes are are less likely to occur when your employees know the rules.  Keep in mind that a well-written employee handbook can help your business but a poorly written handbook can cause even more problems for your business.  Don’t pull a template from the Internet without consulting an employment lawyer.

3.  Maintain your corporate or other limited liability structure.  Make sure to keep your personal guarantees to a minimum, stay current with corporate records, pay your applicable taxes and do not mix your personal assets with your business assets.

4.  Protect your intellectual property.  Consider obtaining trademarks, copyrights and patents as applicable.  Consult an intellectual property lawyer in order to protect yourself against infringers.  Likewise, avoid infringing someone else’s intellectual property.  Before deciding on a business or product name you should check to see if the name is trademarked by someone else.  Similarly, be careful not to steal copyrighted materials for your own use.

5.  Consider alternative dispute resolution.  Mediation is often an efficient way to resolve business disputes.  Mediation is a process in which the parties to a dispute, with the assistance of a neutral third party (the mediator), identify disputed issues, develop options, consider alternatives and work to reach an agreement. There is a time to go to court but consider the costs of the litigation before making that decision.  Approach the decision of whether to litigate in a business-like-manner rather than emotionally.

Last week I attended the Iowa State Bar Association Employment Law Seminar.  One of the more interesting discussions involved whether an employer should ask an applicant whether he or she is a U.S. citizen or authorized to work in the U.S. on the employment application.  There was some lively debate on the issue. 

The speaker on immigration law, James Benzoni of Des Moines, advised that employers should not ask the question on the employment application.  He said asking the question prior to hiring opens the employer up to possible national origin discrimination claims and that the I-9 process takes care of determining whether the employee is eligible after hiring.  He asked, "Isn’t that why we have the I-9 process?"

The Staff Selection blog has a list of questions not to ask in an interview or employment application.  The blog post (source: Business.gov) advises that it is acceptable to ask, "Will you be able to show proof of eligibility to work in the U.S. if hired?" 

But if I understand Benzoni’s advice correctly he would argue why even take the chance with that question.  Isn’t it presumed the applicant is able to show proof of eligibility?  Isn’t that part of why the applicant is applying for the job – because they’re eligible to work in the U.S.?

Benzoni makes a good point.  Before hiring, questions regarding whether someone is a U.S. citizen or eligible to work in the U.S. could open the employer to possible discrimination claims.  The I-9 process does flush out whether the employee is able to show proof of eligibility.

The question of citizenship and eligibility is frequently asked on employment applications so employers would be wise to review their applications and ask their employment lawyer for specific advice on the issue.

The Iowa consumer class action case against Microsoft begins tomorrow, November 13, 2006.  It is anticipated it may take weeks to pick the jury and the trial itself could take several months.  The jurors will be expected to complete a 31-page survey before the questions even begin.  Surveys are often used by Plaintiffs’ attorney, Roxanne Conlin, as a part of her jury selection process.  Having the survey though will help both sides.  The lawyers are able to learn a great deal more about prospective jurors and ultimately their biases.   

The jury pool for this case is substantially larger than your ordinary case.  You generally have about 24 prospective jurors in the jury pool of a typical civil case in Polk County, Iowa.  In this case, approximately 450 people will be a part of the jury pool.

The case involves involves allegations that Microsoft used anti-competitive practices to drive up the cost of its Windows operating system, as well as its Microsoft Office, Word and Excel programs.  Potential members of the class include any person, business or organization that bought those programs.  About $450 million is at stake. 

The plaintiffs were already dealt a significant blow in pre-trial motions when Judge Scott Rosenberg ruled the plaintiffs could not proceed with a "loss of innovation" theory for damages.

If you are interested in learning more about the issues in the case you may want to check out Des Moines patent lawyer Brett Trout’s podcast interview with David Lawrence.

Stay in touch for more as the trial proceeds.

I recently enjoyed the book Mavericks at Work, Why the Most Original Minds in Business Win.  The authors are William C. Taylor and Polly LaBarre.

According to the book the first question to ask yourself is:  Do you have a distinctive and disruptive sense of purpose that sets you apart from your rivals?

An example is Cranium which had a much higher purpose than just selling their games.  Instead, they were rethinking how parents could relate to their kids and how families could relate to one another.

My sense of purpose with this blog is that I can educate and provide information to clients and business people in such a way that helps them identify legal issues and make more informed choices about what legal services they need.   

So ask yourself, what is your higher purpose?

New York Small Business lawyer Imke Ratschko presents a helpful e-book on her blog "Small Business Guide to Risk Management – A complete guide for business decision-makers" published by the Association of Small Business Development Centers.

This easy to read guide discusses the many risks that businesses face and provides checklists to assess those risks and mitigate them to the extent possible.

In particular, employee related lawsuits are a major concern of many businesses.  The guide contains an excellent overview of the issues related to human resources.  From the human resource section:

At a minimum, employers should ensure that they are in strict compliance with all applicable federal and state labor regulations.  A next step would be to institute proactive management policies and practices to educate managers and employees about their respective rights and responsibilities.  Employee lawsuits are often a symptom not only of perceived transgressions, but also of low employee morale brought on by ineffective or indifferent management attitudes.

Another insightful section involves intellectual property including patents, trademarks, copyrights and trade secrets. 

I encourage you to check it out.