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 site for
basic information about the disclosures you can expect to
receive.
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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 Bureau for 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.org
and 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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