A Tale of Two Opportunities

Regulation & Investigation

The Regulators

The FTC is the federal agency that regulates the sale of franchise and business opportunities by requiring disclosure to be delivered before the buyer makes a commitment. Check out its website at www.ftc.gov for some useful overview information. The states also have a plethora of laws in these two areas. If you have a question, contact the attorney general or consumer-protection offices in your state. Whether or not your state specifically regulates franchise and business opportunities, these offices can probably help you.

The FTC and 14 Franchise Investment Law states require that a disclosure document be delivered. Then those states go further and require the franchisor to file with state authorities annually to receive the right to offer franchises in each state. The Franchise Investment Law states are: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin.

Most of the state business opportunity laws also require pre-sale disclosure and registration. The Business Opportunity Sales Law states 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.

Question Everything

If you're a serious franchise investor, you'll receive a disclosure document at least a couple of weeks before you sign up-but maybe not until then (tip: Ask for one early). And if you're looking at a business opportunity investment, you probably won't receive a disclosure document at all. Without that valuable document in hand, you have to quiz the sellers for information they may not be serving up at their sales presentations. Here are some key questions you should get answers to:

  1. What is the total investment I should expect with your program?
  2. How many business opportunities/franchises in your program have been purchased in the past six months? Have any been purchased in this market? Can you give me the names and telephone numbers of those buyers? Can I also have the names and numbers of people who quit the program in the last year?
  3. How long have you been in business? Are you a member of the Better Business Bureau? What is the name of the corporation making this offer? How substantial is the seller corporation? Can I have a copy of its current audited financial statement?
  4. Has the company registered this offering with any state agency as a franchise or business opportunity? If so, where? Does the company comply with the requirements of the FTC's Franchise Rule by delivering a disclosure document? If so, how can I arrange to receive one?
  5. Must your buyers sign any contracts to close the sale? How can I get a copy of the form of contract you use?

Andrew A. Caffey is a franchise attorney in the Washington, DC, area; an internationaly recognized specialist in franchise and business opportunity law; and former general counsel of the International Franchise Assocation.

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This article was originally published in the May 2005 print edition of Entrepreneur's StartUps with the headline: A Tale of Two Opportunities.

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