A disclosure statement is a document that contains everything there is to know about the business opportunity and the seller's company. It includes the promoter's financial strength, how many operating units there are, and exactly what you're going to be required to pay in total so there are no hidden fees. The purpose of the disclosure statement is to protect the licensee as well as the licensor and to eliminate some unscrupulous licensors.
As already mentioned, some 26 states have legal requirements for disclosure statements and registration. In addition, there are also federal laws regarding business opportunities. The most significant is the FTC rule requiring full disclosure of the business opportunity on a national level. The rule doesn't require a registration, but it does require a disclosure that follows a specific format.
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Most states that have disclosure requirements parallel the federal standards of information that must be supplied to the buyer. In addition, state-required disclosure statements often include information stating that the buyer has three to seven days referred to as a "cooling off" period so the purchaser/investor can reconsider the subject after being bombarded by sales pitches from slick salespeople.
When reviewing a disclosure statement, be aware of the following items:
- The licensor. The history of the parent company needs to be detailed. It should include the identity and business experience of any persons affiliated with the licensor, whether the company has been involved in any litigation, whether it or any of the officials in the company have ever declared bankruptcy, any other initial payment or any payment in total, and any other fees.
- Obligations of the licensee. If there are any financing arrangements, they have to be stated. If you are going to be required to buy from any supplier, that should be stated up front. The disclosure statement also states what the parent company will have to provide in terms of equipment, training, ongoing services and a training manual.
- What the licensor promises to deliver. This should include whether you're getting an exclusive area or territory as a licensee. Any trademarks, service marks, trade names, logo types and commercial symbols as well as any patents or copyrights which you're going to be able to use as a licensee need to be identified in here.
- Obligation of the licensee. This is how you will participate in the actual operation of the business opportunity. If this is an absentee business, it must be stated. If the licensor indicates that you must personally operate the business, that should also be stated. Restrictions on goods and services offered by the licensee are covered. It has some provisions for renewal and termination, repurchase and modification. It also has to list the current licensees and their addresses so you have the opportunity to contact these people.
- Public-figure relationships. If this is a business opportunity that is identified with a given public figure like a celebrity or athlete, it should indicate what arrangements have been made with that person. Is that person active in the business or receiving a royalty out of the proceeds?
- Financial statements of the company. This is required in almost every state. It is an audited financial statement prepared by a CPA. There is usually a letter from the accountant indicating that the books have been audited and are available for people to study. Any estimates or projections of earnings would have to be part of the disclosure statement.