Cliff Ennico
You have built a successful business and have set up a training program to teach people how to start and run that business successfully. They don’t have to use your name, nor will they be given assigned territories. But they will have to pay a sizable upfront fee for the training program and pay additional amounts for annual refresher courses, one-on-one coaching or consulting and other services.{mprestriction ids="1,3"}
Congratulations, you will not be considered a franchise for legal purposes.
But condolences, you may have a business opportunity on your hands and you will have to comply with a crazy quilt of regulations in 25 states.
Last week’s column focused on how to figure out when a business training program becomes a business opportunity. Once you know it is a business opportunity, here’s what you have to do:
First, you need to find out if you must give each participant in your program the disclosure statement required by the Federal Trade Commission. Check out the following webpage on the FTC’s website: www.ftc.gov/tips-advice/business-center/guidance/selling-work-home-or-other-business-opportunity-revised-rule.
The FTC Business Opportunity Rule (16 CFR Part 437) dealing with “business opportunity ventures” regulates only one type of business opportunity — the sale of vending machines or rack displays if you help purchasers find customers or locations. The rule defines a business opportunity venture as: 1. The seller sells goods or services which are supplied by the seller or a person affiliated with the seller; 2. The seller assists the buyer in any way with respect to securing accounts for the buyer or servicing accounts for the buyer or securing locations or rates for vending machines or rack displays or providing the services of a person able to do either; and 3. The buyer is required to make a payment of $500 or more to the seller or a person affiliated with the seller at any time before or within six months after the business opens.
If you fall within the FTC’s definition of a business opportunity venture, you must give each prospective customer a disclosure statement on the FTC’s printed form, which is available online at business.ftc.gov/businessopportunitydisclosure.
If you do not come under the FTC’s jurisdiction, you may still have to comply with the laws of 25 states that regulate business opportunities. At the present time, those states are: Alaska, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire (for vending rack-type programs only), North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia and Washington.
Virtually all of these states require you to prepare a disclosure statement conforming to the state’s requirements and deliver it to prospective purchasers at least X days before you take their money. (The “X” will vary from three to 10 business days.)
The good news is that the state requirements are fairly uniform. If your attorney does a good job preparing a disclosure statement for one of these states, the same statement probably will satisfy the requirements in other states with only a minimum of tweaking.
Some states require that you register your business opportunity with state regulators. This will involve preparing an application form, a disclosure statement and certain other documents and submitting them for filing along with a fee, which is usually in the $100 to $500 range.
As part of the application process, some states will require you to submit financial statements (income statement, balance sheet and statement of changes in financial condition) for your most recently completed fiscal year. If more than three months have elapsed since the end of your most recent fiscal year, you may be required to submit updated financial statements for the current year-to-date.
In most states, your financial statements do not need to be reviewed or audited. A handful of states, however, require all financial statements to be audited, a process which may cost you as much as $10,000 to $15,000 in accounting fees.
If you are making claims that purchasers will earn at least a specific amount of money, or if you guarantee purchasers a return of their money at some point, some states will require you to post a surety bond, letter of credit or some other guaranty that you will be able to honor those claims when the time comes. (Kentucky requires a $75,000 bond from all registered business opportunities.)
A number of states limit the amount of money you can accept from purchasers until they complete their training. If you require purchasers to pay the entire fee up front, you will have to put most of this money into escrow until you have delivered the training you promised.
Finally, a number of states require you to give purchasers up to three business days after signing your contract to change their mind and get their money back.
Do not attempt to set up a business opportunity without the assistance of a good lawyer AND a good accountant. You will need them.
Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
COPYRIGHT 2023 CLIFFORD R. ENNICO
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