If you are interested in starting a new business, you may be attracted by “out of the box” business opportunities offered by sellers that promise immediate success. Some of these schemes have rightly earned a bad reputation, for example, false promises that you will make thousands of dollars per week simply by stuffing envelopes. Other business opportunities are legitimate but federal and state laws have been enacted to protect purchasers from being misled.
What Is a Business Opportunity?
The definition of a business opportunity is spelled out in the Federal Trade Commission’s Business Opportunity Rule (FTC Rule), which applies in all 50 states. In addition, about half of the states have their own business opportunity laws. In those states, if a business opportunity falls within the FTC Rule’s definition, then it must comply with that rule as well as with state law, if state law includes additional, more stringent requirements.
Generally, under the FTC Rule, a business opportunity is a commercial arrangement in which:
- A seller solicits a prospective purchaser to enter into a new business; and
- the prospective purchaser makes a required payment; and
- the seller represents (either in writing or orally, and either by an express statement or by implication) that the seller or another named person or persons will do at least one of the following: provide locations for the business to operate; provide outlets, accounts, or customers; or purchase any or all of the goods or services the purchaser produces or provides.
Note: The FTC Business Opportunity Rule does not apply to franchises, which are a different type of business arrangement that typically involves an ongoing relationship between the buyer and the seller, higher upfront costs, and more rules for the buyer to follow in operating the franchise. In contrast, business opportunities do not involve an ongoing relationship, cost less, and do not require buyers to follow the seller’s rules in running the business.
What Are Sellers of Business Opportunities Required to Do?
Under the FTC Rule, a seller of a business opportunity must provide a one-page document (plus attachments) disclosing
(1) complete contact information for the seller, the name of the salesperson, and the date the disclosure document is provided to the buyer
(2) any legal action taken against the seller
(3) whether there is a cancellation or refund policy
(4) any earnings claims, i.e., assertions that the buyer will earn a specific amount of money from the business opportunity (including a separate statement attached to the disclosure document), and
(5) references for the seller including the contact information of at least 10 purchasers nearest to the new buyer’s location.
This disclosure document must be provided to the buyer at least seven calendar days before the buyer signs any documents connected to the sale of the business opportunity, for example, the execution of a contract, or pays any money to the seller.
Note: The FTC Rule prohibits the buyer from waiving or disclaiming receipt of these required disclosures. This means that the seller cannot avoid civil penalties for violations simply by asserting that a buyer agreed to purchase a business opportunity despite not receiving the disclosures required by the FTC Rule, even if the buyer knew those disclosures were required.
Among the states that have business opportunity laws, some have additional requirements beyond what is required by the FTC Rule, for example:
- Additional disclosures, registration, or notice to the state before the business opportunity is offered;
- Registration and/or filing fees;
- A post-sale right to rescind the purchase;
- Delivery of any items purchased as part of the business opportunity within a certain period of time; and
- Delivery of the disclosure statement during the pre-sale period in less than the seven days required by the FTC Rule.
Although the FTC Rule applies in all 50 states, state law will also apply if it provides the buyer with additional protection.
If you are considering purchasing a business opportunity, it is important to check with us prior to the purchase to ensure that the seller with whom you are dealing complies with federal, and if applicable, state law. As experienced business law attorneys, we can guide you through the purchase of a business opportunity, a franchise, or a pre-existing business. Please call today to schedule a consultation.
By: Danielle Taylor