Franchise and Business Opportunities

December 1996

Want to be your own boss? A franchise or business opportunity may sound appealing, especially if you have limited resources or business experience. However, you could lose a significant amount of money if you don't investigate a business carefully before you buy. The FTC's Franchise and Business Opportunity Rule requires franchise and business opportunity sellers to give you specific information to help you make an informed decision.

Use the FTC Rule
A franchise or business opportunity seller must give you a detailed disclosure document at least 10 business days before you pay any money or legally commit yourself to a purchase. You can use these disclosures to compare a particular business to others you may be considering or simply for information. The document includes:

• the names, addresses, and telephone numbers of other purchasers;

• a fully-audited financial statement of the seller;

• the background and experience of the business's key executives;

• the cost of starting and maintaining the business; and

• the responsibilities you and the seller will have to each other once you've bought.

If the seller doesn't give you a disclosure document, ask why. Some sellers are not required to provide a disclosure document. If a franchise or business opportunity seller says it's not covered by the Rule, verify it with the FTC, an attorney, or a business advisor. Even if the business is not legally required to provide a disclosure document, you still may want one for your own information.

Get All the Facts
Before you buy a business:

• Study the disclosure document and proposed contract carefully.

• Talk to owners. They can be valuable sources of information. The disclosure document must list the names and addresses of current owners and operators. Ask them how the information in the disclosure document matches their experiences with the company. A list of references selected by the company is not a substitute for a list of franchises or business opportunity owners.

• Investigate claims about your potential earnings. Some companies may claim you'll earn a certain income or that existing franchisees or business opportunity purchasers earn a certain amount. Companies making earnings representations must provide you with the written basis for their claims. Be suspicious of any company that cannot substantiate its earnings representations in writing.

• Sellers also must tell you in writing the number and percentage of owners who have done as well as they claim you will. Keep in mind that broad sales claims about successful areas of business — "Be a part of our four billion dollar industry," for example — may have no bearing on your likelihood of success. You also have to realize that once you buy the business, you may be competing with franchise owners or independent business people with more experience.

• Shop around: compare franchises with other business opportunities. Some companies may offer benefits not available from the first company you considered. The Franchise Opportunities Handbook, published annually by the U.S. Department of Commerce, describes more than 1,400 companies that offer franchises. Contact those that interest you. Request their disclosure documents and compare their offerings.

• Listen carefully to the sales presentation. Some sales tactics should signal caution. For example, if you are pressured to sign immediately "because prices will go up tomorrow," or "another buyer wants this deal," slow down. A seller with a good offer doesn't use high-pressure tactics. Under the Rule, the seller must wait at least 10 business days after giving you the required documents before accepting your money or signature on an agreement. Be wary if the salesperson makes the job sound too easy. The thought of "easy money" may be appealing, but success generally requires hard work.

• Get the sellers promises in writing. Any oral promises you get from a salesperson should be written into the contract you sign. If the salesperson says one thing but the contract says nothing about it or says something different, the contract is what counts. If a seller balks at putting oral promises in writing, be alert to potential problems and consider doing business with another firm.

• Consider getting professional advice. Ask a lawyer, accountant, or business advisor to read the disclosure document and proposed contract. The money and time you spend on professional assistance, and research — such as phone calls to current owners — could save you from a bad investment decision.

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