When starting a new venture, people understandably want to know what they’re getting into.
Some gravitate toward franchises because of the amount of regulation within the industry. The presence of the Franchise Disclosure Document (FDD)—a government-required document detailing a franchise’s operation—is a major part of this. In addition, some states require franchises register with them in order to operate within their jurisdiction.
Still, many opportunities to own a business fall under the category of business opportunities (sometimes referred to as “bizopps”)—a less regulated space. To aid in helping interested parties avoid undesirable investments, the Federal Trade Commission (FTC) created the Business Opportunity Rule. Under the rule, sellers have to give you—the buyer—a disclosure document overviewing your potential investment before any binding agreement is made.
Although not as thorough as the FDD—FDDs can be hundreds of pages in length while business opportunity disclosure documents can be as short as one page—the information from the document can be used to fact-check what the seller tells you about the opportunity and what you’ve discovered from your own due diligence (research).
Enacted in March 2012, the business opportunity disclosure document has to:
- Identify the seller
- Divulge info about certain lawsuits or other legal actions involving the seller or its key personnel
- Explain if the seller has a cancellation or refund policy (if so, the terms of that policy)
- Give a list of at least 10 references
- Clarify whether the seller is making an earnings claim (i.e. “Earn up to $100,000 a year!”)
If the business opportunity seller does make an earnings claim, it’s then necessary that the seller produce an earnings claim statement. The statement must include:
- The name of the person making the claim and the date
- The specifics of the claim
- The period of time in which those earnings were achieved with a start and end date
- The number of people who got those results or better, and it’s percentage of the system
- Any information about those people that may differ from the buyer (e.g. the part of the country where they live)
- A statement that the buyer can get written proof of the seller's earning claims if the buyer requests it
The Business Opportunity Rule also makes clear certain practices that are against the law, for example:
- Sellers can't claim they're offering you a job when they're really promoting a business opportunity
- It's illegal for business opportunity sellers to say anything that contradicts what's in their disclosure document or earnings statement
- Sellers cannot misrepresent the investment (e.g. say you will have an exclusive territory when you won’t)
The business opportunity disclosure document is required to be produced in any language that a business opportunity is promoted in, and must be updated every quarter year. In addition, much like a FDD, the business opportunity disclosure document must be signed, dated and returned to the seller by the prospective buyer. In the case of the business opportunity disclosure document, the timeline is at least 7 days before a contract is signed and/or money is exchanged whereas the timeline is 14 days beforehand for a FDD.
Ultimately, for either a business opportunity or a franchise, it is up to the buyer to perform their own due diligence to make an informed decision. In addition to online search and speaking with others who work with the company, you can check out a company with your local consumer protection agency, your state Attorney General, or the Better Business Bureau. Remember not only to look them up where you live, but where the company is based as well.
Additionally, strongly consider seeking professional advice. Ask a lawyer, accountant, or other business advisor to go over the paperwork with you before you sign.
A portion of this post originally appeared as the “Avoiding Scams” section of our Home-Based Franchise & Business Opportunity Report, which can be viewed here.