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Buying a business opportunity, franchise, licensee opportunity or distributorship is a big decision, one you shouldn’t take lightly. Thankfully there are some serious regulations in place at the federal level as well as within many states that are designed to protect you from making a bad decision or being taken in by a fraudulent enterprise, starting with the critically important disclosure statement.
The disclosure statement is a document that any seller of a business opportunity, franchise or similar concern is required to provide to you as a potential buyer by law. It details everything you need to and should know about the business in question and must be given to you if not during the first “personal meeting,” then within a specified timeframe. Although the disclosure requirements as delineated by the U.S. Federal Trade Commission (FTC) are considerable, they are not overruled by those set forth by the 26+ states that also have them. So be certain to check the regulations in your state in addition to those of the FTC before you sign on the dotted line or give the seller any money.
Remember, oral statements, exchanges or promises that are made to you by the seller or between the two of you are not legally binding! This is precisely why knowing what comprises a comprehensive disclosure statement is so important.
So here it is, a brief overview of what a truly solid disclosure statement should contain as stipulated by the FTC:
Name under which the seller is doing business, including such particulars as trademarks, trade names and service marks, et al.
Five-year or more retrospective of principal players’ business experience, as well as any parent firms
Seven-year retrospective re: any legal entanglements involving either the principals or the company, including such things as fraud, felonies, civil actions, et al.
Past seven-year fiscal profile to include bankruptcy, insolvency, etc.
Factual description of the enterprise being sold
Clear statement of total funds to be paid by the buyer and under what conditions, as well as any refund policy
Clear statement of any recurring funds to be paid, for what purpose, at what intervals and under what conditions
Required affiliations between the buyer and any other concerns as set forth by the seller
Required purchases, leases or rentals as set forth by the seller
Clear accounting of the financial implications for the seller as a result of buyer arrangements with identified suppliers or other concerns
Material terms and conditions of any financing arrangements between the seller and the buyer
Clear statement of facts re: goods and services for sale, potential customers and/or geographic parameters for the sale of allowed goods and services, as well as any agreement with regard to protected markets/territories
Clarity on expectations re: direct operation of the purchased enterprise and by whom
Details re: duration of the arrangement between the seller and buyer, renewal, extension, termination, modification, sale, refusal to renew or extend, etc.
Total profile of affiliated concerns to date, with emphasis on those nearest to the potential buyer’s intended locale, including contact information for referrals
Role of the seller, if any, in site selection for the enterprise
In-depth review of initial and ongoing training program(s) and what can be expected
Public figure affiliation (on the part of the seller) disclosure, if applicable
Most recent fiscal year financial statement (balance sheet), as well as other income-related documents as specified.
In addition, the FTC stipulates that a number of CAUTION notices be included in the disclosure statement, just to ensure there is no confusion as to what is being promised. Where you see one, pay attention. Finally, any seller of a business opportunity, franchise, licensee opportunity or distributorship that promises you a specific level of income is doing so at their own peril, unless the context in which they are providing the information meets with some pretty specific requirements. For a more in-depth look at what those are, as well as the overall disclosure statement content as prescribed by the FTC that is outlined here, please click on the Commission’s Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures webpage now.
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The Opportunity Analysis Canvas By James V. Green (Author)
“From the creator of “Developing Innovative Ideas for New Companies”, the #1 course in entrepreneurship with over 600,000 learners from 175 countries. IN THE OPPORTUNITY ANALYSIS CANVAS, DR. JAMES V. GREEN...
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