You have built a successful business and 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, as well as additional amounts for annual refresher courses, one-on-one coaching or consulting, and other services.
Congratulations! You will not be considered a franchise for legal purposes.
But my condolences, because 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 whether you must give each participant in your program the disclosure statement required by the Federal Trade Commission. Visit the FTC website at www.ftc.gov/tips-advice/business-center/guidance/selling-work-home-or-other-business-opportunity-revised-rule.
The FTC Business Opportunity Rule defines a business opportunity as any program offering buyers the opportunity to enter into a new business if the buyer is required to make an upfront payment of $500 or more to the seller and the seller promises:
—To provide locations for the use or operation of equipment, displays, vending machines, or similar devices that the buyer is required to buy from the seller and lease to others; to provide outlets, accounts, or customers for the buyer's goods or services.
—To buy back goods or services that the purchaser makes, produces, fabricates, grows, breeds, modifies or provides, such as stuffing envelopes from the purchaser's home or raising chinchillas in the back yard.
The mere providing of marketing advice by a seller will not create a business opportunity unless the seller assists the buyer in identifying specific customers (for example, by providing a list of all Asian restaurants in a certain ZIP code that might be interested in leasing a gum ball machine from the buyer).
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 fall 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 or 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 number of 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 will probably satisfy the requirements in other states, with only minimum tweaking needed.
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. But a handful of states 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 guarantee 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 upfront, 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 ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.