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:
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:
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.
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.
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
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