An entrepreneur at heart and attorney by profession, it is only right that I share my experience and lessons with you as you embark on this great journey to becoming a business owner or transition into the franchising world.
Growing up in the housing projects of upstate New York, I realized very early on that the only way to move up and out was to get an education and gain financial freedom. I barely finished high school when I started my first business as a weekend vendor at the local flea market while still holding a full time job and going to college full time; I have never looked back. I wanted to grow to gain financial freedom and do things others only dreamed about.
In order to step up my game, I sought to get into franchising because it had the highest chances of surviving in the business world – these people had systems. I wanted to learn from their experience rather than stumbling on my own. After running around for a couple of years to learn how to get into a franchise, I finally bought my first franchise in my early twenties.
To say I started out completely on the wrong foot is an understatement. Yes, I was a fool! I received the Franchise Disclosure Document and signed the Franchise Agreement and Commercial Lease without ever going through an attorney or an advisor. For goodness sakes, I didn’t even create a company for my franchised business.
I eventually learned about the benefits of having an entity as opposed to owning as a sole proprietor only after purchasing my second franchise (for my 2nd Franchise, I bought a Little Caesars) but, only after initially setting up everything as a sole proprietor again. Imagine the pain of having to switch everything from your name to the entity name and I mean everything: the lease, franchise agreement, permits, licenses, phone directory, bank accounts, credit card machine processor, vendors, the list goes on and on and of course there were fees involved. I learned my lesson on my 3rd Franchise unit and set up my business entity up front.
A week after the grand opening of my new unit, I became gravely ill and realized for the first time the importance of a solid exit plan. I also realized how unpredictable life can be and that I needed to protect my assets. I had my first trust drafted as soon as I left the hospital, placing all my assets in the trust and assigning the shares or rights of each entity into the trust to not only protect my assets and ensure my privacy but to also ensure my children were taken care of exactly as I wanted. I realized that if anything happened to me, just having a will, or hoping that someone would follow my wishes was just not responsible thinking.
If you are thinking of owning a business or small business it is essential that you use the tools available to you for a fraction of the cost of your new venture. As a franchise and business owner, I have been in your shoes. Initially, I didn’t know there were attorneys who could help you in reviewing the Franchise Disclosure Document, Franchise Agreement, commercial lease or creating business entities or trusts to protect my assets, etc. Once I found out that these guys were out there and knew what they were doing, I told myself it was an unnecessary expense, I couldn’t afford it and I could do it myself – after all, I got this far without them.
Believe me, I know your struggle and how you feel about the extra costs associated with these services but, I will tell you from experience that you need a franchise attorney from the very beginning even with the cost. If you think that you can’t afford to spend a few thousand dollars to set up your entity properly and line up your documents properly now, then you for sure cannot afford to put several hundred thousand dollars at risk if and when the venture doesn’t work out as you planned. It’s like buying a $350,000 home and not paying for the $350 home inspection because you cannot afford it.
I will share my new “Life-Experienced Must Do Plan” before I start any venture. I highly recommend that you follow this list to ensure you avoid the pain and extra expenses that I did. It is a relatively short list, only 4 steps, and well worth the effort:
1) Set up the proper business entity properly – i.e. Limited Liability Company, C-Corporation, S-Corporation, Partnership, Family Partnership, etc. By properly I mean some people either fill out the form with the Secretary of State or pay a book keeper a flat fee to set up the entity for them. They, act as if the entity is some sort of a magic box which will protect them as soon as they create the entity and place it on their shelf.
In order to truly take advantage of the benefits of any entity, one must not stop at the filing; that’s not the important part. You must follow the formalities and rules associated with the entity ie. proper documenting, proper reporting, annual meetings, etc.
And for goodness sakes, don’t use an online template site. Have your attorney prepare these documents to be specific to the type of franchise you are buying for maximum protection of liability.
You need to ensure that the company will operate the way you want it to if anything was to happen to you or if your situation changes. Whether you are single or married, you should have provisions that address all of life changes within the Operating Agreement or Bylaws. For example, if you are single now and your partner is single, and you own 50/50%, you should discuss and then place into writing within your documents what exactly happens if one of you later gets married and then gets divorced: does the spouse that didn’t exist when you started growing the business now get 25% of the business?
Also consider if one of you may die, is the spouse now your working partner? Do they have a say in how the business runs? There is a myriad of items that need to be covered legally so that you do not end up in an unanticipated place in your business.
Once the attorney sets up the proper legal entity for you and your situation, put it in your Trust, which is further discussed under step 3.
2) Have your attorney review your purchase contract, franchising agreement if any, and commercial leases before signing. If the business you are starting or purchasing is a franchise, it is essential to have a franchise attorney review the Franchise Disclosure Document and Franchise Agreement before you sign and pay the franchise fees. As previously stated, the reason most people are attracted to the franchise business is because the franchise has systems that prove what works and what doesn’t. The franchisee wants to take advantage of this knowledge and experience instead of starting on their own and going through the hurdles and failures on their own.
Just like the franchise system, the right franchising attorneys have systems in place as well. They know what to look for in the Franchise Disclosure Document, Franchise Agreement, commercial lease, etc. They will inform you about language in these documents that may be to your detriment, have excessive fees and penalties for non-compliance, and limit your ability to compete. They will advise you of the applicable federal, state and local laws and inform you of your rights. They may be able to look at trends, past history, and have industry specific knowledge which will help you make an informed decision.
Our firm has a commercial real estate arm which helps with the lease negotiations, market research, statistical analysis to determine if the sites selected, territory assigned etc. will give you ample opportunity to grow and keep competitors away from your business or if it will stifle your business and limit your activity. They also insert protections from the franchisor, other franchisees and the law.
3) Set up a trust and plan your estate. You have worked hard to get where you are, it only makes sense to protect what you’ve worked so hard to build and to ensure that the business will continue without hiccups in case of incapacity, divorce or death. I know this is a difficult subject to broach and sometimes results in high strung emotions to say the least, but it is necessary in this unpredictable and highly litigious environment we are in today.
There are many benefits to setting up a trust vs. a will. A trust is private unlike a will and the assets pass on to your beneficiaries without going through the very public, expensive and time consuming process called probate. A trust gives you the freedom to do with your assets whatever you please while alive and beyond the grave.
I highly recommend setting up your trust and assigning the rights or shares of your business to the trust for maximum protection, liability, and ease of business succession. You can name successor trustees, name your beneficiaries, exclude individuals or entities, name a guardian for your minor or special needs children, or set up special trusts to take care of your pets or donate to specific charities. You can control who gets what, when they get it and how they get it to ensure your beneficiaries don’t squander everything you have worked for.
Our estate planning package includes a power of attorney which gives an individual or entity the power to continue the business and take care of the day to day operational needs while the healthcare directive gives doctors and your loved ones specific instructions regarding your wishes to protect them from having to make difficult decisions that they will not want to make.
4) STAY INFORMED, GO BIG, AND STAY HUMBLE! You have a dream so go for it. Stay humble – realize that you don’t know what you don’t know. Surround yourself with experts and advisors who will walk you through all 3 steps above. You may even want to look for a business legal retainer attorney, who offers a small monthly retainer to go over all questions and issues you have as you start your new business. This will eliminate paying costly legal fees by the billable hour, which can quickly grow out of control, while still giving you the advice and counsel you need to become a further informed entrepreneur.
My great-granny always said “if you’re not learning you’re dead”! No matter how much experience you have in business, franchise or entrepreneurship, there is always more to learn. Go big, and reap your rewards of entrepreneurship.
Nooria Kakar joined the Shelton & Power team as an attorney in their California office, after receiving her J.D. from Concord Law School. Nooria handles Estate Planning, Business, Real Estate, Wills and Trusts for our clients. She enjoys sharing her knowledge and wants clients to know that they are represented by a lawyer who understands all aspects of real estate and business development from extensive practice and personal experiences.
Lynne Shelton in a previous life was a franchisor of a large franchise system, and is currently a Senior Partner at Shelton & Power franchise law firm. Shelton & Power Attorneys have 25+ years of business consulting, franchise and trademark experience. Our knowledge facilitates an understanding of a large variety of businesses, services and technologies. We help businesses protect their brands through Trademark, Copyright, and Business contractual transactions. These services allow us to “Expand their Brand” through Franchising. For existing Franchisors, we provide full outsourced in house counsel.
For more information or to schedule a customized consultation for your business you can write to email@example.com or call (866) 99-FRANCHISE.