Sunday, September 30, 2007

Franchising Pros & Cons

Thinking about starting or buying a franchised business? There are certainly lots of franchise opportunities out there. And there is some important legislation out there, as well, which attempts to provide some protection for potential investors. In Ontario, that legislation is called the Arthur Wishart Act. One of the things the Act does is sets out a number of disclosure requirements for franchisors so that potential buyers have information pertaining to the history of the franchise and its current status. Franchisors are required to provide potential franchisees with a "disclosure document" which will provide background information and a sample franchise agreement for review prior to the potential franchisee making a final decision to move forward. Franchise Agreements may or may not be negotiable. Usually it depends upon the strength, popularity and age of the franchisor. But even if you can't change a thing in it, it still makes good sense to understand what you are signing and the pros and cons. If I am asked to review a franchise agreement, I will often go through the agreement, using two very simple notations:

1. - The letter "C" for control: areas which indicate that the franchisor has control over decisions effecting your business - such as controls over pricing or inventory; and

2. - The dollar sign ($): areas where the franchisor has the power to make you spend further money - such as forced upgrading to leasehold improvements or forced buying from franchisor-approved suppliers only.

Buying a franchise can often be a very lucrative way of starting a business. The upside should certainly be the fact that you will benefit from the experience of the franchisor and also from things like combined marketing, trade-name value, etc. The downside is that, quite often, you will need to give up some control over the business operations. Franchising is not for everyone. If you are consideraing it, speak to a lawyer and make sure it's a good fit for you. Knowing what the arrangement will be from the outset and being sure that it fits with your plans and your personality makes good business sense.

Monday, September 24, 2007

Don't Forget the Right to Renew!

I just had a client call me in a panick because they had been advised by their Landlord that they would need to vacate their leased premises at the end of the initial term of their lease. The Tenant was shocked because they had negotiated a right to renew in the Lease and thought they had another 5 years. Unfortunately, they did not comply with one of the conditions to exercising this right, by providing the Landlord with 6 months advance written notice of its intention to do so. The Landlord took advantage of the oversight because it was able to lease out the entire floor of the building (which included my client's space) to a new tenant. Our client was stuck looking for new space. This can be a very difficult position to be in, as tenants often spend a great deal of money, up front, on leasehold improvements. Also, location can be extremely important to the ongoing success of a business. In this case, the Tenant turned the surprise into an opportunity and ended up purchasing new business premises, but the lesson is an important one. If you have a right to renew in your lease, make sure that you know what the conditions are to exercising it and diarize the proper dates to make sure you comply. That's good business.

Wednesday, September 12, 2007

The Ongoing Costs of Incorporating

I often get asked about what costs are associated with being incorporated, aside from the initial start up fees. This is an excellent question, as you will want to factor this into any decision to incorporate and your ongoing business budgeting.

First, it will be necessary to keep your minute book up-to-date. Corporate law requires that companies have yearly meetings of both the shareholders and directors to do a number of things including re-electing the directors and officers, approving the yearly financial statements, and exempting the company from the requirements of an audit (if applicable). If a company has only one or two shareholders, instead of holding a meeting, resolutions can be prepared and signed by all of the shareholders and all of the directors of the company. Most corporate lawyers provide their clients with a yearly corporate maintenance service. There is usually a small fee associated with this service, which varies from firm to firm but is usually under $500 for basic annuals (at least in Barrie!). The law firm will contact the company's accountant and inquire as to whether any management bonuses or dividends have been declared. The appropriate resolutions are then prepared and, if there have been any changes to things like the directors or the registered office, they will file the applicable forms providing the government with notice of these changes.

The second ongoing cost will be the accounting fees. You will have an additional corporate tax return to file yearly and financial statements to prepare. Your accounting fees will therefore likely be higher. You should speak with your accountant about this so that you are able to do a complete cost-benefit analysis. Finding out about not only the upfront costs but also the ongoing costs of incorporating is just good business.

Tuesday, September 11, 2007

Think of Income Splitting When Incorporating

If you are considering incorporating your business now or down the road, you should have a discussion with your accountant and lawyer about any income-splitting opportunities that you may have. If you have a spouse, or children over 18, it may be useful to create some separate classes of shares so that you have some flexibility when declaring dividends. Let's use an example of a business where the husband is the sole proprietor and his wife stays home with the kids and has no income. If the husband is going to incorporate, he may want to ask the lawyer to create a separate class of common shares. So, for instance, the husband could have voting Class A Common shares and the wife could have nonvoting Class B Common shares. Both classes of shares would share in the growth of the business. The husband would retain voting control and, therefore, control over the business. However, it would be possible, from year to year, in conjunction with the advice of the company's accountant, to issue dividends to only the Class B shares. If the wife has no other income, she could potentially receive in excess of $20,000.00 per year in dividends, tax free. This is a relatively simple way to achieve some tax savings, but be sure that your lawyer is an experienced corporate lawyer who is able to set up these shares appropriately. If done with solid financial and legal advice, this makes good business sense.

Monday, September 3, 2007

Get It In Writing

When you are in business, you may often find yourself entering into agreements with other business people - perhaps suppliers or customers. Some people are proud that they can do business on a handshake, but I personally feel that, if there is any degree of sophistication to a deal, it should be in writing.

Writing it down makes sure everyone is on the same page. Did you ever play that game as a kid, where you start off whispering something to someone in a circle and, by the time it gets to the end of the circle, the original message has turned into something completely different? The same thing can happen when you have a conversation with someone about a business deal. It just seems that, quite frequently, two people can come away from a conversation having very different recollections of what transpired and very different expectations about what is to be done.

This difference of opinion is often at the root of law suits. When people's expectations are not met, they tend to sue. If you can get something down in writing and hash out the details ahead of time, it can significantly cut down on confusion around who is doing what, by when and for how much. By going through the exrecise of writing it down, people usually discover that there are more details to be dealt with than they may have anticipated. Discussing the details ahead of time helps the parties to clarify all of the terms of the deal. Even if you do this without a lawyer, it can at least help to avert confusion around the basics of the transaction, and this is important.

If you want to go a step further, you get a lawyer to draft the agreement, and that way you should be able to depend upon that agreement being legally enforceable. There are aspects of contract law that we lawyers study that assist us in ensuring that the basic components of a contract are in place, so that, if necessary, the contract can be used as the basis upon which one party can pursue another party on default. Also, the process of working with a lawyer to draft the agreement can assist the parties in considering all of the angles and discussing, ahead of time, the "what ifs". The parties can actually decide, in the contract, what the consequences of default will be. This provides some stability and fairness to the enforcement process.

It may be useful, in your business, to have a standard form contract, that can be modified to incorporate the specifics of each transaction. This could be drafted by a lawyer, without having to pay a lawyer everytime you enter into a new contract.

Whether you involve your lawyer or not, getting it down in writing will go a long way to making your business run more smoothly and, you will likely end up with happier customers, whose expectations are being met at an agreed-upon rate by an agreed-upon time. And this just makes good business sense.