Business opportunity laws are a combination of federal and state laws that regulate and govern the sale of business opportunities that, typically, involve the purchase of inventory, equipment, customer accounts, and other business assets for the purpose of starting a new business. Business opportunity laws are similar to federal and state franchise laws in that they are designed to protect a buyer by requiring the seller of the business opportunity to provide pre-sales disclosures and information.
Federal Business Opportunity Laws
At the federal level the business opportunities laws are comprised of the Business Opportunity Rule issued by the Federal Trade Commission under 16 CFR 437. The FTC is charged with the enforcement of the federal business opportunity laws and under the federal Business Opportunity Rule, Business Opportunity sellers must provide and disclose to their buyers a pre-sales business opportunity disclosure document that contains information about legal actions against the seller, whether or not the buyer may cancel the agreement, whether or not the seller makes any earnings claims about how much can be made from the business opportunity, other information, and a list of references that include other buyers of the business opportunity. The Federal business opportunity laws also prohibit certain deceptive acts and practices such as requiring a buyer to sign a disclaimer or waiver, misrepresenting potential sales or earnings, making claims that contradict the disclosure document, and other practices.
Under the Federal Business Opportunity Rule the offer or sale of a Business Opportunity is defined as a commercial arrangement that involves:
- Solicitation by a Seller
A solicitation by a seller where the seller solicits that a prospective buyer enter into a new business
- Required Payment
An agreement where the buyer is required to make a payment to the seller
- Seller Representations
The seller, expressly or by implication, orally or in writing, represents that seller or seller's designee will either:
- Provide Locations - provide locations for the use or operation of equipment, displays, vending machines, or similar devices owned, leased, controlled, or paid for by the buyer; or
- Provide Outlets, Accounts or Customers - provide outlets, accounts, or customers for the buyer's goods or services; or
- Buy Back - buy back any or all of the goods or services that the buyer makes, produces, modifies or provides.
State Business Opportunity Laws
The following states have enacted business opportunity laws: Alabama, Alaska, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Nebraska, New Hampshire, North Carolina, Ohio, South Carolina, South Dakota, Texas, Utah, Virginia and Washington. Although the state laws vary, similar to the Federal Business Opportunity Rule, state laws require pre-sales disclosures and prohibit certain practices involving the sale of a business opportunity.
Franchise vs Business Opportunity
Although similar, franchises and business opportunities are governed by separate laws and involve different degrees of control within the respective commercial relationships between franchisor-franchisee and business opportunity seller-buyer. Within a franchise relationship the franchisor exerts or possesses the legal right to exert continuing control over the franchisee's business operations whereas, within a business opportunity relationship, the continuous control is lacking and is limited to the initial development stage of the new business.
Since the goal of both the franchise laws and the business opportunity laws are designed to protect buyers through pre-sales disclosures, there is overlap and many states expressly recognize exceptions and exemptions to their business opportunity laws and requirements for franchisors that comply with the Federal Franchise Rule. The line between what constitutes a franchise and what constitutes a business opportunity is extremely fine and, generally, requires an evaluation of the obligations and legal rights between the parties.
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