A Des Moines Business Record article discussed the growing number of franchises in Iowa. The article also discusses some of the pros and cons of franchising. A critic of franching described it as "indentured servitude by contract". He stated that some franchisees have a tough time continuing in the business after the end of the franchise relationship. While the criticism does have some validity most franchises are agreeable to extending the franchise beyond the initial term if the franchisee is not in default.

The pros of franchising include access to a network of similarly situated business owners. You can also gain market share quickly with an established name. Many frachisors will also provide marketing and management support.

The key is to thoroughly investigate any franchise opportunity. You need to talk to as many franchisees as possible to determine if the franchisor will keep their word. I usually tell clients to keep talking to franchisees until you hear something bad (that way you can avoid mistakes and get an honest assessment of the opportunity). Review the UFOC and franchise agreement carefully. It is a good idea to have the UFOC and franchise agreement reviewed by an experienced franchise attorney. A franchise is a substantial investment so do not take the decision lightly.

Click here to read the franchising article at The Des Moines Business Record’s Website.

SPAMMER TO REINVENT HIMSELF: MOVIE TO FOLLOW?

I recently read an article about the The State of Texas and Microsoft filing a lawsuit against one of the world’s worst purveyors of spam, Ryan Pitylak. Pitylak apparently admitted to sending out 25 million spam emails a day at the height of his business operation. Pitylak was fined $1 million and has been forced to sell his house and BMW. Things would not seem to be going his way, right? Not so fast.

In taking a page out Frank W. Abagnale’s book (you remember the movie, Catch Me If You Can)Pitylak is reborn as an anti-spammer and is offering is services to Internet companies so they can stop folks like himself. If he’s lucky maybe there will even be a movie made about him.

Only in America.

BIG BROTHER IS WATCHING

Tech companies are getting ready for a big fight. The Bush administration is calling for Internet and telephone companies to keep detailed records of customers’ online activities for a period of at least two years. Frankly, that is scary.

The government wants more than just terrorism and child porn searches. According to the experts the government is saying keep everything on everyone and we will sort it out later. Companies such as Google and Qwest have been resistant to such requests. I hope other companies will follow suit.

In my opinion, the chances of exploitation are considerable. Fighting criminal activity and terrorism is one thing but opening up everything to the government is going too far.

It is a common misperception that franchise agreements are not negotiable. Often the franchisor will negotiate on certain terms and conditions. You may, however, run into a franchisor who will not negotiate the terms and conditions of its agreement. Is those instances should you still hire a lawyer to review the agreement? The answer is . . . (you probably guessed my response) yes.

Even if the agreement is not negotiable it is important that you fully understand your legal rights and your responsibilities under the franchise agreement. Most franchise agreements contain a significant amount of legalese that may be difficult for non-lawyers to understand. Further, there are important franchise laws in Iowa which you should become familar with to help you deal with a franchisor. (See Iowa Code 523H) Some of these Iowa laws are pro-franchisee and may be particularly helpful in the event you have a dispute with a franchisor. A lawyer can help you understand these laws.

An experienced lawyer who reviews franchise agreements and Uniform Franchise Offering Circulars (UFOC) frequently may also be able to assist you in determining whether the agreement is fair – even if it is not negotiable. The lawyer should be able to tell you whether the agreement and the UFOC complies with applicable laws and whether it contains the information franchisors are required to provide to franchisees.

Click here for more information about franchise UFOC and agreement review services.

DES MOINES UTILITY FRANCHISE TAX CASE HEADED TO TRIAL

Last week, the Iowa Supreme Court reversed a lower court ruling on a franchise tax issued by the City of Des Moines on utilities. Des Moines had been sued in District Court by Lisa Kragnes seeking to declare the utility franchise tax illegal. She won in district court when the judge granted her motion for summary judgment. The City of Des Moines appealed and the Iowa Supreme Court reserved the summary judgment decision.

The Supreme Court reversed the case because it ruled a geniune issue of material fact exists as to whether all or part of the franchise fees are reasonably related to the City’s administrative expenses. The Court ruled there is no question the grant of the franchises to the utility causes the City to incur some ongoing administrative expenses in the exercise of its police power. These expenses would include the reasonable costs of inspecting, supervising and otherwise regulating the gas and electric utility franchises.

The Court has now remanded the case to the district court for a trial on the merits. The critical issue is whether the fees charged by the City of Des Moines bear a relationship to the cost to the City of the utility’s occupancy of public areas in the City. The Court said the case record is replete with references that the City of Des Moines used a portion of the franchise fees for purposes other than administrative expenses. The Supreme Court, however, ruled that this fact alone does not mean Des Moines is not using other streams of revenue to cover the administrative expenses it incurs as a result of granting MidAmerican the gas and electric utility franchises.

The upcoming trial will determine if the franchise fees are in fact reasonably related to the City’s administrative expenses. If not, the district court will then issue an order disallowing the franchise fees as contained in the ordinances. If the franchise fees are reasonably related to the administrative expenses, the court shall enforce the ordinances up to an amount equal to the fees reasonably related to the City’s administrative expenses in exercising its police power.

FACTORS IN FORMING YOUR IOWA BUSINESS

You are considering forming an Iowa small business. What type of business structure should you choose? In Iowa, your choices generally are a sole proprietorship, S corporation, C corporation, or a limited liability company.

Some of the factors to consider in choosing a business structure are:

1) Personal liability protection;
2) How profits are taxed;
3) Ability to take advantage of fringe benefits;
4) Ease in raising capital.

A sole proprietorship is the easiest to set up (you generally do not need to take legal action) but you have unlimited personal liability. In today’s sue happy society it is probably a good idea to consider a form of business that provides you with personal liability protection like a corporation or LLC.

Traditionally, most small business owners selected the S corporation as their form of business. The S corporation is often a good choice because it provides you the limited liability you need but you avoid double taxation because all business profits are taxed to you as an individual. The limited liability company has become popular over the past decade and also provides you limited liability and avoidance of double taxation.

The C corporation has traditionally been used for larger businesses but accountants will often recommend it because the owners can take advantage of certain fringe benefits. Also if you need outside capital, a C corporation may make it easier to attract investors.

So which business structure should you choose? Before choosing a business structure it is wise to talk with an accountant. The accountant can review your financial situation with you and advise you on the best strategy for your business. In my view the choice of a business structure usually boils down to tax treatment. So talk to your accountant first and then go to the business lawyer to set up the business entity.

Click here for more information on forming your Iowa business.

Importance of Trademarks

Des Moines Iowa patent and trademark attorney Brett Trout recently wrote three good articles on the importance of trademarks. With the Internet, even the smallest of companies should become familar with trademark issues in order to protect their business names and logos.

Go to http://blog.bretttrout.com for more information.

Are you looking to purchase a franchise business in Iowa? If so, you should consider having the Franchise Uniform Offering Circular and Franchise Agreement reviewed by an attorney to make sure the documents comply with applicable federal and state laws. There are a number of specific Iowa law provisions relating to transfers, jurisdiction, application of state law, renewal and selling your franchise which are often not contained in typical out-of-state franchisor agreements. A review can help point out those applicable Iowa franchise law provisions which may be helpful if you end up in a dispute with a franchisor.

A common misperception is that franchisors are unwilling to negotiate their franchise agreements. In fact, many franchisors are willing to negotiate certain terms with prospective franchisees. A review by an experienced franchise attorney can point out the areas for possible negotiation with the franchisor.

Overall, a franchise attorney review can also help give you a better understanding of your obligations as a franchisee and the duties of the franchisor. It is good idea to fully understand these issues before making the substantial investment required by most franchisors.

Click here for more information about franchise UFOC and agreement review when buying an Iowa franchise.

ASSET PROTECTION IS NOT JUST FOR THE RICH

There is a often a misperception that asset protection is only for rich. This is not the case. Every business owner should give consideration to asset protection. In fact, asset protection strategies are generally inexpensive compared to the potential liability.

The best time to consider asset protection is when you start your business. The first way to protect your assets is through insurance. Two typical and necessary business policies are general liability insurance and workers’ compensation insurance. In certain instances you may need other coverages, endorsements or riders depending on your particular situation. On the personal side you may also want to consider an "umbrella" policy in addition to your home and auto insurance.

The second way to protect your business is through business structures such as a corporation, limited liability company (LLC) and limited partnerships. These business structures are generally afforable for almost every business owner. In fact, if you cannot afford to set up a limited liability structure for your business you should perhaps give a second thought as to whether you have enough capital to be in business. Certain advantages these structures provide include:

1. Protect Your Personal Assets From Business Liabilities

You can conduct your business while protecting your personal bank accounts, home and other personal assets from claims against the business. Sole proprietorships and partnerships do not offer such protection.

2. Protect Your Business From Personal Liabilities

You can also protect your business from personal liabilities. Imagine you lost a significant personal judgment. Having a business structure with limited liability will separate your business assets from your personal finances. This makes it more likely that you will be able to continue your business operations without interruption even though you have a personal judgment. Without a limited liability business structure in place your business assets are left open to the creditors of the personal judgment.

Please click here for more information on protecting your assets by incorporation or LLCs.

RULES OF BUYING A BUSINESS: RULE NO. 3: WRITE A CAREFUL OFFER

Once you have decided to move forward with buying a business you should write a careful offer. First, I recommend you consult a lawyer to assist you in writing the offer. The cost is often not as much as people might imagine and it could help you from making a major mistake. For example, do you want an asset or stock purchase? There is a big difference in the legal and tax consequences between the two types. Second, you will want to draft the offer with certain contingencies in mind. A nonexhaustive list of such contingencies may include:

1) Due diligence including, but not limited to, financial review, taxes (income, sales and employment), corporate structure review, inventory issues, asset lists, lawsuits, real estate or lease issues, contracts review, employment matters, etc.;

2) Financing;

3) Necessary approvals from governing or regulatory bodies;

4) Environmental issues (if applicable);

5) Obtaining agreements on non-competes for owners and key employees;

6) Representations and warranties;

7) Continuation of the normal operation of the business with no material changes;

8) Penalty provisions in case the owner sell or negotiates with another person after accepting the offer;

9) Other issues specifically related to the situation.

I also highly recommend contacting an accountant before making an offer. It is important to gain enough financial information up front in order to make a reasonable offer based upon your own financial situation. Keep in mind that if you have a loan or other debt you may need a significant cushion to make the payments and support yourself too. DO NOT BUY ON EMOTION – SEE RULE NO. 1. Unless you are a financial expert you should have the accountant review the financials in order to help you understand how much you can reasonably pay for the business.