Buying a franchise or a business opportunity may be appealing if you want to be your own boss, but have limited capital and business experience. However, without carefully investigating a business before you purchase, you may make a serious mistake. It is important to find out if a particular business is right for you and if it has the potential to yield the financial return you expect. The FTC's Franchise and Business Opportunity Rule requires that franchise and business opportunity sellers provide certain information to help you in your decision.
Under 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. This document gives 20 important items of information about the business, including:
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 required to start and maintain the business; and
the responsibilities you and the seller will have to each other once you buy.
The disclosure document is a valuable tool that not only helps you obtain information about a proposed business, but assists you in comparing it with other businesses. If you are not given a disclosure document, ask why you did not receive one. Some franchise or business opportunity sellers may not be required to give you a disclosure document. If any franchise or business opportunity says it is not covered by the rule, you may want to verify it with the FTC, an attorney, or a business advisor. Even if the business is not legally required to give the document, you still may want to ask for the data to help you make an informed investment decision.
Here are some important things to do before buying a business:
Study the disclosure document and proposed contract carefully.
Talk to current owners. The disclosure document must list the names and addresses of other people who currently own and operate the franchise or business opportunity. These people are likely to be important sources of information. Try to call a number of owners to find out about the company. Ask them how the information in the disclosure document matches their experiences with the company. Remember, a list of company-selected references cannot be substituted for the list of franchises or business opportunity owners required under the FTC rule.
Investigate earnings claims. Earnings claims are only estimates. The FTC rule requires companies to have in writing the facts on which they base their earnings claims. Make sure you understand the basis for a seller's earnings claims.
Sellers also must tell you in writing the number and percentage of other owners who have done as well as they claim you will do. Remember broad sales claims about a successful areas of business such as, "Be a part of our four billion dollar industry" may have no bearing on the likelihood of your own success. Keep in mind that once you buy the business, you may be competing with other franchise owners or independent business people with more experience.
Shop around: compare franchises with other available business opportunities. You may discover that other companies 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 other companies and ask for their disclosure documents. Then you can compare 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," you should slow down, not accelerate, your purchase decision. A seller with a good offer does not have to use this sort of pressure. Remember, under the FTC rule, the seller must wait at least 10 business days after giving you the required documents before you may pay any money or sign any agreement. Be on guard if the salesperson makes the job sound too easy. The thought of "easy money" may be appealing, but, as we all know, success usually requires hard work.
Get the seller's promises in writing. Any important 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, your contract is what counts. Whatever the reasons, if a seller balks at putting verbal promises in writing, you should be alert to potential problems. You might want to look for another business.
Consider getting professional advice. Unless you have had considerable business experience, you may want to get a lawyer, an accountant, or a business advisor to read the disclosure document and proposed contract to counsel you and help you get the best deal. Remember, the initial money and time you spend on getting professional assistance verifying facts, such as making phone calls to owners, could save you from a major loss on a bad investment.
Although the FTC cannot resolve individual disputes, information about your experiences and concerns is vital to the enforcement of the Franchise and Business Opportunities Rule. Send questions, complaints, or requests for more detailed information to: Correspondence Branch, Federal Trade Commission, Washington, D.C. 20580. For a free copy of Best Sellers, a complete list of all the FTC's consumer and business publications, contact: Public Reference, Federal Trade Commission, Washington, D.C. 20580; (202) 326-2222.
FTC CONSUMER & SMALL BUSINESS ADVISORY - PUBLIC DOCUMENT
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