Just the FAQs

Business Opportunities vs. Franchises

Q: I've heard franchising is heavily regulated, but that it's a different case for business opportunities. Is that so, and how are they different?

A: Yes, the government has inserted itself into the franchise and business opportunity arena. As with your car, the safety features mandated by the government help but don't completely protect you in the event of an accident. You have to buckle up to protect yourself.

In 1979, the FTC adopted a set of rules all American companies must follow when selling a franchise or business opportunity. Before the sale, they must deliver a document to a prospective franchisee or business opportunity buyer, including a prescribed list of information that tells the investor who the seller is and what the buyer will receive for the investment. Go to the FTC's Web sitefor basic information about the disclosures you can expect to receive.

This requirement is far more developed and more widely applicable for franchise sales than for business opportunity sales. If you purchase a franchise in the United States, you will, with very few exceptions, receive a completed disclosure document. This document follows a demanding disclosure format developed by state regulators, called the Uniform Franchise Offering Circular (UFOC). If you buy a business opportunity, you may or may not receive a disclosure statement, depending on your state's laws.

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Disclosure is just the beginning of the long list of regulations franchisors must follow. In some states, they must register their franchise offerings before they can run an ad in the state or attempt to offer their programs. The states requiring franchise registration are: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin.

There are nearly twice as many states regulating sales of business opportunities. The 26 states that regulate these sales are: Alabama, Alaska, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia and Washington. Even though so many states are involved, the regulation of business opportunity sales is spotty. The statutes are all different in the scope of their application and the requirements imposed on the sellers.

Q: Is researching a business opportunity investment the same as researching a franchise?

A: Not really. With a franchise, you can be sure of receiving a disclosure document, and that makes a huge difference in the task of researching. For example, most business opportunity sellers do not maintain a continuing relationship with their buyers, so they may not be able to give you a full list of buyers you can contact. If you receive a franchise UFOC, however, you will find such a list in Item 20, showing at least 100 franchisees in the system (or all franchisees, if there are less than 100).

However, the due-diligence process, whether it's for a franchise or a business opportunity, is the same. Check with state agencies and the Better Business Bureaufor complaints or problems. Read all materials carefully so you know what's being offered, ask the sales representative questions (and then ask more questions), visit the company's headquarters, and meet as many company executives as possible.

Q: I want to narrow down my choices of a franchise to buy and was planning on attending a franchise/business opportunity trade show. Is the effort to go in person really worth it, or, with today's technology, can I just get most of the same information online?

A: The Internet is a fabulous source of information, but the ratio of breathless hype to factual information is way too high. By all means, visit the sites of companies that interest you (start with www.franchise.organd Entrepreneur.com), but don't skip that franchise and business opportunity trade show. There is nothing to compare with face-to-face conversations.

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This article was originally published in the June 2003 print edition of Entrepreneur's StartUps with the headline: Just the FAQs.

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