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 Federal Trade
Commission'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 with others you may be considering
or simply for information. The disclosure document includes:
Names, addresses and telephone numbers of at least 10 previous purchasers who live closest
to you;
A fully audited financial statement of the seller;
Background and experience of the business' key executives;
Cost of starting and maintaining the business; and
The responsibilities you and the seller will have to each other once you've invested in the
opportunity.
If the seller doesn't give you a disclosure document, ask why. Verify the explanation with an
attorney, a business advisor or the FTC by calling its toll-free helpline at 1-877-FTC-HELP
(382-4357). Even if the business is not legally required to provide a disclosure document, you
still may want one for your own information.
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Get All the Facts
Before you buy a business:
- Study the disclosure document and proposed contract carefully.
- Interview current owners in person. (They should be listed in the disclosure document.)
Visiting them in person may help you identify any that are "shills"-people paid to give
favorable reports. Don't rely on a list of references selected by the company because it
may contain shills. Ask owners and operators how the information in the disclosure document
matches their experiences with the company.
- Investigate claims about your potential earnings. Some companies may claim that 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 does not show you in
writing how it computed its earnings claims.
- 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 $4 billion industry," for example-may have no bearing on your
likelihood of success. Also, recognize that once you buy the business, you may be competing
with franchise owners or independent business people with more experience than you.
- 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 FTC 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 seller's 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, it's the contract that 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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Where to Complain
The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices
in the marketplace and to provide information to help consumers spot, stop and avoid them. To
file a complaint or to get free information on consumer issues, visit www.ftc.gov
or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters
Internet, telemarketing, identity theft and other fraud-related complaints into Consumer
Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement
agencies in the U.S. and abroad.
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