Orlando Business Lawyer

FRANCHSING: WHAT DOES IT COST?

2010-10-15T06:36:00.000-07:00

What does it cost to franchise?

Not a week goes by that I don’t get a call from a successful business owner wanting to explore “franchising” their business. Typically, during this introductory call (for which there is no charge), the subject comes to a request for a ballpark figure of the costs to franchise. Obviously, that’s a difficult question to answer, when there is a myriad of issues and concerns to be addressed. Here are just a few of the items that I bring to the caller’s attention which are likely to cost money.

Business Plan

Do you have a strategy that is suited to expanding your business? A business plan based on a careful financial analysis of current operations, indicating that your business can be replicated (taught to others), and a well thought out plan for a franchise structure for your business (not the operation to be franchised), that will work as you have envisioned.

Demographics, Customer Bases, Locations, Business Partner Profiles

What are the factors that have made you a success? Before jumping into the franchise world, you need to really understand what has made you successful. Have you defined the demographics, both in terms of your customers and the potential franchisees (business partners) that can perform at the success level needed to replicate the business you have created?

Operating Manuals

Have you started to write manuals describing how your business functions on a day-to-day basis? Are they clear and easy to understand? Do you have business operations and policies written down so that they can be easily followed? If not, you will need to develop them. Your operating manuals are an essential tool the franchisee needs to execute the business in a profitable manner.

Experts

Aside from having a good manual writer (you will likely need an expert in the field to assist you), you need a CPA to prepare initial, and possibly audited, financial statements, and an experienced attorney well versed in franchise law (let’s think Godfrey Legal) to draft the franchise agreement and related documents, including the Franchise Disclosure Document.

Costs?

We’re just now getting there! None of the above comes for free. You can buy a Mercedes or a Hyundai. Think of these variables, add about 50%, and you are in the ballpark. Want some of my guesstimates? Please call me at 407-701-7530 for a free telephone interview.

B.F. "Biff" Godfrey, Esq.
B.F. GODFREY, P.A.
D/B/A GODFREY LEGAL
2601 Technology Dr.
Orlando, FL 32804
(407) 701-7530 (off)
(407) 578-2347 (fax)
biff@godfreylegal.com
www.godfreylegal.com

ESTATE PLANNING PRIMER

2010-04-24T10:00:00.000-07:00

ESTATE PLANNING PRIMER

One of the first things you need to know about estate planning, is there are a minimum of four (4) documents which need to be included: a Will, a Durable Power of Attorney, a Designation of Health Care Surrogate, and a Living Will. Preparing these documents in advance can save you and your loved ones much grief and expense which can occur during times of great emotional stress. Estate planning impacts the control of both your assets and your physical well-being while you are alive but either not able or not competent to make these important decisions.

Will
A Will is a legal document that details who is to receive the various portions of your assets upon your death, who is to act as the Executor to carry out terms set forth in your Will. If you have minor children, it can create a testamentary trust and name a guardian to care for them.
There are a number of unfortunate consequences which can occur if you do not have a Will. Florida statutory laws will dictate who will receive your assets. Your spouse and children might end up with less than you desired, or people you did not want to inherit could end up inheriting your assets. Your minor children could be placed with a guardian selected by the Courts, instead of a guardian of your choice. If a testamentary trust is not created for your minor children, they could inherit money before they are ready to manage it properly.
It is important to know that a will does NOT cover property which you own as a joint tenant with right of survivorship, insurance policies or retirement plans in which you have named a beneficiary, accounts for which you have designated a “Payable on Death” beneficiary, or address your burial plans.

Durable Power of Attorney
A Durable Power of Attorney (a “POA”) is a document that allows you to designate another person (a “Representative”) to perform certain actions for you in case you should become ill, incapacitated or otherwise unable to manage your affairs. The Representative can be your spouse, an adult child or someone else that you trust, who will be able to pay bills, manage your assets, buy and sell securities or real estate, or make other financial decisions on your behalf. The POA can be as broad or as limited as you determine. A POA can be revoked at anytime; however, without a POA, your spouse or other loved ones may be required to to go through expensive court procedures to have a guardian appointed in order to carry out necessary financial transactions.

Designation of Health Care Surrogate
A Designation of Health Care Surrogate is a document, similar to a POA, that authorizes a designated person (the “Surrogate”) to make medical decisions on your behalf if you are unable to make decisions for yourself. Typically, the Surrogate is your spouse, an adult child, or another trusted individual that is designated to act on your behalf to carry out what you've specified in your Living Will (see below) or otherwise follow your previously discussed instructions on handling your medical care. Having a Surrogate that knows your wishes can greatly ease the burden and uncertainty otherwise placed on your spouse and other loved ones if no Surrogate has been designated.

Living Will
A Living Will is also known as an Advance Medical Directive, a Health Care Directive, or a Physician's Directive (and you are probably asked every year by your doctor if you have one and requested to provide a copy for their records). Generally, the Living Will is a person’s written declaration of what life-sustaining medical treatments will be allowed or refused in the event a person should enter in a persistent vegetative state or develop a terminal condition. Many factors must be considered, including but not limited to: finances, health insurance, age, quality of life, the potential burden on loved ones, etc. A Living Will does not become effective unless you are incapacitated; until then you will be able to say what treatments you do or do not want. In most cases, a certification by your doctor and another doctor stating that you are either suffering from a terminal illness or permanently unconscious will be required before becoming effective.

Summary
Estate planning essentially is a way to organize your financial affairs so that when you are unable to manage them yourself, someone of your choice can step in and do it the way you prefer it to be done. It is strongly recommended that you have your estate planning documents drafted by a professional to ensure that they are prepared in accordance with state laws, and you and your loved ones do not end up with estate planning documents that will be contested and invalidated in the courts.
In addition, you should consider renting a safe deposit box at a bank. Into this box, you should put all of your important papers, including the originals of the foregoing documents. Those persons trying to take care of your business affairs will have one central place to go for all necessary documents. Of course, you should keep copies at home in a well known, but secure place, so that, absent immediate access to the safe deposit box, copies are readily available to your spouse, adult children, Executor, Representative, and Surrogate.

Please call me at 407-701-7530 for a free telephone interview. B.F. "Biff" Godfrey, Esq.
B.F. GODFREY, P.A.
2601 Technology Dr.
Orlando, FL 32804
(407) 701-7530 (off)
(407) 578-2347 (fax)
biff@godfreylegal.com
www.godfreylegal.com

SO YOU WANT TO START A NEW BUSINESS?

2010-04-15T11:02:00.000-07:00

I have assisted a number of clients form business entities that meet their particular business and economic concerns. I have noticed that a number of things of a minor nature always come as a “surprise” to my clients, and I would like to share some simple procedures with my readers that may save you time and money in the future. Whether or not you choose to use an experienced business lawyer to assist in setting up your business, remember these few tips:

1. Do you need to file a fictitious name application? Unless your business uses your legal name as the trade name, Florida law requires a simple filing with the state. Don’t forget to do it. It’s simple to fill out the forms and inexpensive. Why you ask? First, not filing the application is a misdemeanor. Second, you can’t file a lawsuit; in addition you may be liable for a plaintiff’s attorney fees if you don’t. Third, most governmental authorities require it, if needed, just to get a permit to do business.

2. Do I need a permit to do business? Yes, both City and County regulations typically require you to get a permit to transact business if you have an “office” in their jurisdiction. (Most places in Florida now call it a Business Tax Receipt and/or Occupational License. You may need both.) This means that even if you work out of your home, you need this permit. There really are very few exceptions.
3. Are you moving into an office building? Be sure to find out if it is zoned properly for your type of business. Will renovations require a permit? Are there sufficient parking and adequate utilities. Is it open for weekend appointments?

4. Do you need a Federal ID number? If you are going to hire employees, which includes your or family members, the answer is “yes”. It is a straight forward process and can be done over the internet. There are a number of tax advantages that are available to you, so talk to your CPA about these issues.

5. Are you an “internet” based business? Many of these issues are too complicated to discuss here, but all of the above probably applies to you.
Without knowing the specifics of your business, there may be many other concerns not listed here that will need your attention. An experienced business attorney can coordinate all of these and similar issues with your CPA and other professional consultants. Don’t hesitate to avoid missteps and mistakes now that may be a hindrance to your future success.

Please call me at 407-701-7530 for a free telephone interview.

B.F. "Biff" Godfrey, Esq.
B.F. GODFREY, P.A.
2601 Technology Dr.
Orlando, FL 32804
(407) 701-7530 (off)
(407) 578-2347 (fax)
biff@godfreylegal.com
www.godfreylegal.com

THE FRANCHISEE PERSPECTIVE: BE ON THE LOOKOUT

2009-09-03T08:14:00.000-07:00

I often receive calls from people who are looking to start their “own” business and have been talking to franchisors about buying into the franchisor’s system. They have a franchise agreement in front of them, and want an attorney to make a quick review, and explain one or two matters to them, so they can proceed to sign on the dotted line by some unfathomable deadline. In answer to my question as to whether or not they have reviewed the franchise disclosure document (FDD) provided by the franchisor, too often I am advised sheepishly that they have only made a cursory review of the FDD. Taking the time to read that 60 to 100 page document because it’s “too technical”, “too boring”, “not understandable”, “unnecessary”, etc., often seems too daunting a task.

It’s at this point that I give my caller some cautionary advice. It is a waste of your time and money to see me for a consult on the franchise until you have done some minimal homework. It takes hours to go through an entire FDD, and it is unreasonable to expect any meaningful advice in a one or two hour consult unless they have done at least three (3) things:

1. Read the FDD and all attachments, including the franchise agreement, in their entirety;
2. Marked the FDD and attachments, flagging items they do not understand or on which they need further clarification (preferably making a written list of all these matters); and
3. Call and talk to least three (3) of each of the listed current and terminated franchisees disclosed in the FDD for their impressions of the franchise and the franchisor.

Here are just a few of the things they will learn by doing their homework:

1. Who the franchisor is, what experience he has in the business, just what the business is, and the past or current problems the franchisor is experiencing;
2. Upfront costs to start up and open the business, and what you will be paying on a weekly, monthly and/or annual basis to stay in business;
3. The type of restrictions the franchisor is placing on the “approved” location, the products and services you can offer, and what other “profit centers” the franchisor has built into his system;
4. Your obligations to the franchisor, both in-term and post-term, and your financial exposure if you fail to live up to those obligations;
5. The obligations of the franchisor to provide initial and on-going assistance in the operation of the business, and to protect you from competition from both the franchisor’s own outlets and other franchisees’ outlets;
6. The financial condition of the franchisor and whether the franchisor has the where-with-all to meet its continuing obligations.

Obviously, there is much more to the franchise relationship that needs to be considered, and you should take the time to understand what you are getting into. Doing the homework will increase the practical value of the consult, and you will be able to make a more reasoned decision as to whether to pursue the opportunity or to keep looking for one that better meets your expectations and objectives.

Is franchising the best way to expand my business?

2009-07-15T08:28:00.001-07:00

Before taking the leap into franchising your business, let’s look at some of the various alternatives to franchising. Franchising is an expensive undertaking, so a different expansion strategy might be a possible route to consider. We will very briefly look at 5 other business expansion vehicles compared to franchising:

o Company-owned expansion
o Joint Ventures and Partnerships
o Independent Sales Representatives
o Licensing
o Distributorships/Dealerships
o Franchising

1. Company-owned expansion
Advantages: Basically, branch offices with control over all aspects of the business.
Disadvantages: Heavy capital outlay, management and employee issues, local state regulations, and ownership liability to third parties, direct financial impact of failures.

2. Joint Ventures/Partnerships
Advantages: Fewer regulatory requirements, greater control and flexibility, synergies of combined business skills.
Disadvantages: Moderate capital outlays, joint and several liability, no up-front payments, direct financial impact of failures, local state regulations.

3. Independent Sales Representatives
Advantages: Independent agent, not an employee, fewer local state regulations, no direct impact for representative’s failure to make sales (hire other salespersons as needed).
Disadvantages: Agency liability, potential tax treatment as an employee, non-exclusive relationship with product.

4. Licensing
Advantages: Lower capital outlay, fewer local state regulations, licensing and royalty fees, minimal oversight and staffing, minimal direct financial impact for failures.
Disadvantages: Minimal controls, teetering on the franchise vs. license ledge (the inadvertent franchise), monitoring issues, “at-will” relationship.

5. Distributorships/Dealerships
Advantages: Lower capital outlay, fewer local state regulations, increased market penetration, potential sharing of some advertising costs, minimal direct financial impact for failures.
Disadvantages: Minimal controls, teetering on the franchise/employee ledge (the inadvertent franchise/employer), monitoring issues, potential termination and renewal, local state regulations, no fees or royalties per se, potential non-exclusive relationship with product.

6. Franchising
Advantages: Greater control of quality and uniformity of brand, franchise fees and royalties, lower capital outlay, motivated operators, enhanced trademark value, no employee burdens, no direct financial impact for failures, increased market penetration.
Disadvantages: Initial costs of setting up system and annual updating costs, significant state and federal regulatory requirements, audit expenses, employing a franchise staff, monitoring of quality and uniformity, greater local state regulations.

The foregoing is not intended to be exhaustive analysis of advantages and disadvantages. You should consult your business attorney or consultant for an in-depth discussion of each business format. However, you should consider whether you and your product might be better suited for an alternative to franchising. In fact, you might look at one or two of these alternatives as stepping stones to ultimately franchising.

Please call me at 407-701-7530 for a free telephone interview.
B.F. "Biff" Godfrey, Esq.
B.F. GODFREY, P.A.
2601 Technology Dr.
Orlando, FL 32804
(407) 701-7530 (off)
(407) 578-2347 (fax)
biff@godfreylegal.com
www.godfreylegal.com

What is the best type of legal entity for my new business in Florida?

2009-06-25T06:49:00.001-07:00

Determining the kind of legal structure you select to conduct business will affect, among other things, the kinds of taxes you will pay, individual verses business liability, and what state and IRS forms to file. There are four basic formats to select from, with each having a number of variations too detailed to discuss here:

1. Sole Proprietorship: A sole proprietorship is easy to set up and easy to dissolve. Profits are taxed at the owner’s individual federal tax rate, with the amount reported on Schedule C or Schedule C-EZ. Sole proprietorships do not pay Florida state corporate taxes and are not required to file state corporate income tax returns; however, the owner is personally liable for all the debts of the business.

2. Partnership: Partnerships can be formed as easily as sole proprietorships. These unincorporated businesses allow two or more people to share liability and provide capital. Business income is reported on partners’ individual tax returns, with the partners being individually and jointly liable for all of the debts of the business. (Limited partnerships are a slightly different form of partnership and must file with the Florida Department of State, Division of Corporations, but only the general partner is liable for all of the debts for the limited partnership.)

3. Limited Liability Company: Limited liability companies (LLCs) are a hybrid form of business that combines elements of partnerships and corporations. In Florida, LLCs may elect whether to be taxed as partnerships or corporations. On the federal level, LLCs with more than one member file a partnership return with the IRS, unless they elect to be classified as a corporation for tax purposes. LLCs, like corporations and limited partnerships, must also file with the Florida Department of State, Division of Corporations. An LLC shares many of the same advantages as an S-Corp., but there are significant differences that affect taxation and share-ownership. When properly organized and run, the owners of an LLC are protected from personal liability for the debts of the business.

4. Corporation: Corporations are separate legal entities that must be incorporated with the Florida Department of State, Division of Corporations. The two types of corporations are the C-Corporation (C-Corp.) and the S-Corporation (S-Corp.). With a C-Corp., the corporation, rather than individual share-holders, pays taxes and assumes liabilities. But a C-Corp’s shareholders pay separate taxes on dividends as they are paid out. An S-Corp. allows a limited number of shareholders to share income and expenses and to report them on their individual income tax returns. However, there are certain additional restrictions on share–ownership and taxation that must be taken into consideration as well. When properly organized and run, the owners of a C-Corp. or an S-Corp. are protected from personal liability for the debts of the business.

Conclusion: Determining which type of entity to select could make differences that may be minor for some, and major for others. In some cases the differences may not even matter if some other overriding factors cause you to choose one entity over another. The important consideration is that before you select the form of the entity, you make the choice based on specific circumstances related to your business or business plan. Consult both your accountant and an attorney to get the best advice. Every business is different, and you should carefully examine the particular facts and circumstances of your business plans and needs before deciding which entity to choose.

How do you determine the worth of a business?

2009-06-24T06:02:00.000-07:00

Any estimate of a business’s value is more art than science. There is no magic formula that will simply tell you with any degree of certainty the value of your business.
Generally, a business’s value is set by negotiations between a willing buyer and a willing seller who have no particular compulsion to buy or sell, with both parties having reasonable knowledge of the relevant facts concerning the business. For the buyer, it’s determined and confirmed through due diligence before and during the negotiation process. That value would be the price, in cash or cash equivalents, which a buyer would reasonably be expected to pay, and a seller would reasonably be expected to accept.

But if you haven’t had someone offer to buy your business or are just considering the purchase of a business, a good range of potential values is not hard to calculate. While working on some buy-out terms of a syndication a number of years back, I was introduced to a fairly simple and quick method to determine, at least in general terms, the value of a business. Look at the last two to three years' income statements. If sales and profits have been relatively stable, compute the average over that period for your net profits before tax, then add back depreciation and amortization charges and the annual interest paid on interest-bearing loans. (If sales and profits have increased significantly over that period, then use the most recent year without an average. If there has been a decline, then look at other factors.)

The result of that calculation is your average EBITDA over the two to three year period or for your last and best year. That's an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. That is the cash flow that is generated with the depreciation and amortization charges added back, and independent of the amount and extent of the company's financing and its tax status.

Now, multiply the EBITDA by a factor that is usually between 3.0 and 7.0. If the business is in a very competitive industry with lots of competition and low levels of proprietary elements, the multiplier would be on the low side. If the business has less competition and holds proprietary elements that tend to reduce competition, the multiplier would be on the higher side.
After deciding on that critical multiplier for your business and applying it to your EBITDA, then subtract all of your company's interest-bearing debts. The assumed debts are as much a part of the purchase price as the cash being paid on the purchase price.

The business is worth is also heavily influenced by more than the competitive nature of your market and the proprietary elements or intellectual property held by the business. The structure of the transaction will also have an influence on the price. For an all cash purchase, the price will be lower than one for which the seller will provide a significant part of the financing by holding a purchase money note issued by the buyer.

Also, most buyers prefer to purchase assets and assume certain of the recorded liabilities. Such an asset purchase transaction usually has a higher price than a stock purchase. In the asset transaction, the buyer has the tax advantages of writing up the value of the acquired assets to their fair market value on the closing date, then depreciating them from that higher cost basis. In addition, the asset purchase offers the buyer more protection than a stock purchase against unknown or unrecorded liabilities.

In a stock purchase transaction, the buyer is buying the entire balance sheet of the business and cannot write up the value of the acquired assets. The buyer can also be subjected to contingent liabilities which accrue to the acquired company that maintains its existence and obligations, both recorded and unknown, after the closing.

Choosing an asset or stock purchase will have significant tax consequences for the seller and, therefore, have an impact on the seller's after-tax proceeds. In a stock purchase, the seller is taxed at capital gains rates for the difference between the selling price and cost basis in the stock. In an asset purchase, other than for a company taxed as an S Corp., the corporation selling its assets will be taxed on that sale and the subsequent distribution by the business to its shareholders of the proceeds from the sale is again taxed at the individual’s tax level.

None of the above-mentioned formulas are magic, but providing this information to a qualified lawyer or accountant will assist them in helping you determine the worth of the business you want to buy or sell, and the most advantageous way to structure the sale or purchase of a business to mitigate significant tax consequences based on your needs and desires.