Whether an entrepreneur is in charge of a seasoned business venture, or is starting a new business, the disclosure statement is an important part of the business deal. This document is a declaration on the part of the promoter, stating his or her exact financial situation and the other entrepreneur’s part in the deal.
Disclosure Statement: Federal Laws to Protect the Licensee
There have been many cases of unscrupulous business opportunity providers swindling unsuspecting franchisees. They lure them by promises of huge dividends. The Federal Trade Commission has proposed several statutes for protecting a person who has become part of a business venture. Several of these proposed laws relate to disclosure statements.
Section 437.2: Showing Proper Documents
As a franchisee, you have a right to ask for a disclosure statement from the business venture firm. Moreover, the statement should be provided to you a minimum of seven days before you enter into a formal agreement, or sign any documents with the seller.
At the present time many states have laws that require franchising companies to furnish a complete disclosure statement before the parties enter into any legally binding contract. Some states have also made it mandatory for firms to show the disclosure statement to the franchisee at least seven days in advance. However, these laws are not uniformly binding across the US. Only 26 states have such statutes to protect the franchisees.
Disclosure Statement: Points to Keep in Mind
When going through a disclosure statement, there are a few things you must keep in mind.
1 Antecedents of the Licensor: Find out all you can about the firm in question, its affiliates, its marketing strategies, any past or pending litigation, and any reports of financial irregularities.
2 Franchisee Requirements: If you are a franchisee, or are going to fund a business venture, then you need to know what is expected from you, in terms of finances, training, and infrastructure. The document should state exactly what you are expected to do as part of the business venture. This can be whether you are just supposed to lend your name to the business, whether you are to run the venture, or whether you can run the business through a third party.
3 Financial Statement: The firm is obliged to give you a detailed report of its finances, after being audited by a CPA.
4 Licensee Equipment: You need to know what the company will provide you with so you can run your business venture successfully. Infrastructure, equipment, training, books, as well as the use of registered names and logos must be carefully discussed.
Don’t be taken in by clever marketing gimmicks. If the business firm proposes to make you rich overnight, then go through the disclosure statement very carefully. Make sure there are no hidden costs. Whatever you have to pay should be stated plainly on paper. Following these precautions, you can avoid being cheated by unethical business firms, and start your own successful business venture. Experienced consultants can help you get your business off the ground, and turn it into a lucrative franchisee arrangement.
David Gass is President of Business Credit Services, Inc. His company publishes afree weekly e-newsletter on Small Business Consulting at their web site smallbusinessconsultingdotcom