Primer for the Business
    Opportunity Purchaser

    READ THIS BEFORE YOU SIGN ON THE DOTTED LINE


      The Author:

        Michael J. Katz practices law in Denver, Colorado, where his emphasis is on real estate, franchise, corporate, and contract transactional and litigation services. He also is a member of the National Panel of Arbitrators of the American Arbitration Association and is the author and co-author of articles on franchising and non-competition clauses.

        E-mail: bizlaw@ix.netcom.com
        Web:         www.businesslawyer.com


    By Michael J. Katz

    WNING YOUR OWN BUSINESS is part of the American Dream. Purchasing a franchise or business opportunity is the most viable way to reach this goal. According to the U.S. Department of Commerce, approximately 40% of all retail sales in the United States are rung up at a franchise or business opportunity outlet.

    But don't be fooled into buying the deal that promises you will earn $8,000 while you sleep. The old adage is still true: If it sounds to good to be true, then it usually is. You can protect yourself from the flim-flams and can separate the facts from the fiction with a little investigation. This article will help you begin your research1.

    IN THE BEGINNING . . .

    THE FIRST AND MOST important questions you must ask yourself before you even begin to shop for a business opportunity are these:

    • Do I have the drive and desire to be my own boss? Remember that a business opportunity can only succeed if the owner has the inner desire to get up early and go to bed late in order to make the business work.
    • Do I have the business acumen to operate a business? Running a business requires accounting, legal, marketing, people and sales skills. While you don't have to be expert in these areas, you must be willing to learn enough about each to run your business successfully.
    • Do I have the monetary "staying power" to weather the inevitable ups and downs associated with any business? If your family will suffer, or if your bills will go unpaid when that "slow" months pop up, then you must reconsider the decision to buy into your own business.
    • Do I know what I want to do? Look for business opportunities that take advantage of the skills that you already have. It is not a good time to learn a new business at the same time that you are trying to open it. Take inventory of your abilities and talents and look for something that complements them.

    Having satisfied yourself as to the above, and having decided on the very business that complements your skills, you are now ready to look into the vast universe of business-opportunity sales.

    A WORD OF CAUTION

    PURCHASING A BUSINESS opportunity is scary for any but the most sophisticated investor. Before taking the final leap consider retaining the services of a knowledgeable attorney or other professional. He or she must be proficient in this area of the law and must be willing to provide the emotional and intellectual support that will be needed throughout this process. The money will be well spent. Use this person as your sounding board and confidant.

    SO, WHAT AM I LOOKING FOR?

    TO PARAPHRASE A PUNDIT, the mere offering of a business for sale does not a "business opportunity" make. The term "business opportunity" is legalese for the sale of a money-making opportunity that meets the following "general" criteria:

    • A sale or lease of any product, service, supply or good;
    • for a minimum fee (typically $500 or more);
    • which will enable the purchaser to start a business;
    • for which there is a market;
    • and for which the seller will provide:
      • location assistance; or,
      • the assurance that the purchaser will derive an income; or,
      • a refund of any part of the purchase price; or
      • any type of training program.

    The above elements are further qualified by the laws of some 26 states2 (we will call these the "Registration States.") which may add definitions to the above. If you are a purchaser living in a Registration State, then it will be important for you to contact your counsel or your state's attorney general for a copy of the business opportunity law.

    Should the prospective purchase not fall within the above definition, then you may not be purchasing a "business opportunity"3. Even then, you should contact your attorney or other professional counselor for advice before signing any documents.

    Assuming that the prospective purchase does fall within this definition, then further investigation will be required before an intelligent decision on the purchase can be made.

    SHERLOCK HOLMES HAS NOTHING OVER YOU

    MOST OF THE REGISTRATION STATES require the seller to provide the prospective purchaser with a disclosure document (we will call it the "Disclosure"). The Disclosure is at the heart of your investigation and should contain at least the following information4.

    • The name that the seller will use while conducting business in your state;
    • The business structure under which the seller operates (e.g. a corporation, partnership, etc.);
    • The address and telephone number of the home office;
    • The names and addresses of the principals of the seller including any officers, directors, managers, and in some states those of the sales staff;
    • As to each person listed as a principal of the seller, and for a period of a minumum of the preceding seven years, the seller must provide a detailed description of the following:
      • Any bankruptcies or liquidations suffered during a minimum of the previous seven years;
      • Any convictions or pleas of no contest to a criminal act;
      • Disclosure of any civil action, judgment, restraining order, or the like which may, in any way, affect the seller's right to sell a business opportunity in your state or in any other state.
    • Disclosure of any financing being offered by the seller;
    • A description of any exclusive territory offered to the purchaser;
    • A detailed statement of the services, goods and materials that you are purchasing;
    • A detailed statement of the cost of the opportunity. In some states they must also provide a statement of any on-going costs that will be associated with the purchase;
    • A detailed description of the training that you will receive;
    • A description of any cancellation rights that you may have;
    • A statement as to whether the purchaser must deal exclusively with any vendor in order to run the business and the name and address of such vendor;
    • If the seller makes any kind of statement about the potential for the opportunity to make money for the purchaser, then the seller must provide the detail that supports the statement and must provide the prospective purchaser a copy of the same if requested;
    • Some states also require the seller to provide the number of opportunities that have been sold in your state during the last year -- there is value to knowing that you are the first or the 10,000th purchaser!
    • A copy, usually audited, of the seller's balance sheets and profit and loss statement for the most recent fiscal year along with any quarterly reports on the same subject;
    • A copy of the actual contract that the purchaser will be expected to sign5.

    If you are uncomfortable with any of the answers provided, then follow up with questions (preferably in writing) to the seller. The seller's cooperation in this effort will speak volumes for how you will be treated if you buy the opportunity. Also, you should contact the attorney general to make sure that the seller has registered the opportunity with the state. The mere statement that such registration has taken place should be tested.

    If you reside outside of the Registration States, take heart! Your investigation is not thwarted. Remember, as a consumer, you have the right -- no -- you have the duty to investigate the opportunity before you buy. Use the above checklist, quiz the seller as to each point, and put the answers in writing. A seller's reluctance to cooperate may be an indication of problems with the opportunity or the seller, and should be weighed by you before you buy6.

    SO NOW CAN I BUY THE DARN THING?

    WAIT. YOU'RE NOT DONE investigating. Remember that you will be paying an average price of between $2,000 and $20,000 to buy opportunity. Do the same thing that you do at the grocery store -- comparison shop. Go into the marketplace and see if a competitor can provide the same, or better, services for the same or less price. Do the leg work; it will be worth your time.

    I'M GETTING ANTSY

    BEFORE YOU TAKE THE final step of signing on the dotted line and handing over the cash, negotiate. There is nothing to be lost by talking with the seller about the price of the opportunity, or of any of its components. Though the seller may indicate that the purchase price is fixed, there may be some room to reduce the price of subsequent inventory purchases. There is nothing to lose by asking. Frankly, if the seller refuses to answer questions, or listen to your request for negotiation, you should again ask yourself if you want to do business with this person.

    SO SIGN ALREADY!

    ASSUMING THAT YOU have been fully disclosed in accordance with the law, have fully investigated the opportunity to your satisfaction, have obtained any professional counsel that you felt was necessary, and are still willing to go forward, then in the words of my grandmother: "So sign already!"

    Good luck and make a million.


    FOOTNOTES

    1. Franchises and business opportunities are not equal. While all franchises are business opportunities, not all business opportunities are franchises. This article will focus only on the business opportunity. Return

    2. The states are as follows: AL; CA; CN; FL; GA; IL; IN; KY; LA; MD; ME; MI; MN; NC; NE; NH; OH; OK; SC; SD; TX; UT; VA; WA. Tennessee and D.C. have a version of the registration law and are considered "Registration States." Return

    3. These may include distributorships, licenses, and the "mom-and-pops" who are selling their only business to you. Return

    4. Remember that the Registration States disclosure laws may vary the amount of information needed. Call your attorney general or seek adequate professional counsel. Return

    5. Typically, under state law the Disclosure must be delivered to you "before" you sign the contract or give the seller any money. Check with your counsel or the attorney general. Return

    6. It is noteworthy that the Federal Trade Commission has stated that even in the non-registration states, business opportunity sellers must deliver the minimum disclosure described above. With this in mind, my advice to all of my bus-opp-seller clients is to generate the Disclosure regardless of the state in which her or she intends to sell. As my old law professor said when speaking of such disclosures: "When in doubt, give it out." The honest seller should never be adverse to providing the disclosure information. Return

    Web Law Review, Winter 1997

    Text © 1996-97, Michael J. Katz
    Web Package © 1996-97, EagleLink
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