Franchise and business opportunities

Want to be your own boss? A franchise or business opportunity may sound appealing, especially if you have limited resources or business experience. However, you could lose a significant amount of money if you don’t investigate a business carefully before you buy. The Federal Trade Commission’s Franchise and Business Opportunity Rule requires franchise and business opportunity sellers to give you specific information to help you make an informed decision.

The Federal Trade Commission (FTC) has a variety of information on franchises on its website. Among the helpful information is Buying a Franchise: A Consumer Guide (business.ftc.gov/documents/inv05-buying-franchise-consumer-guide) plus cautionary information about scams and multilevel marketing opportunities (ftc.gov/bcp/menus/consumer/invest/business.shtm).

You can avoid getting hit by the pitch. Here’s how:

  • Take your time. Don’t be rushed into buying anything at a franchise or business opportunity seminar. Avoid high-pressure sales pitches that require you to buy now or risk losing out on the opportunity. Remember, solid opportunities are not sold through nerve-racking tactics.
  • Investigate the business you’re considering investing in. Talk to experienced business people and experts in the field before spending your money.
  • Be wary of “success stories” or testimonials of extraordinary success. The seminar operation may have paid “shills” to give glowing stories.
  • Be cautious about purchasing from seminar representatives who are reluctant to answer questions, or who give evasive answers to your questions. Remember that legitimate businesspeople are more than willing to give you information about their investment or sales opportunity.
  • Ask about how much money you need to qualify for the investment or sales opportunity, and ask about the company’s refund policy. Get this in writing. Keep in mind that you may never recoup the money you give to an unscrupulous seminar operation, despite the operator’s stated refund policies. Taking precautions before you invest is a more effective way to safeguard your money than trying to get a refund after the investment’s been made.

Use the FTC rule

A franchise or business opportunity seller must give you a detailed disclosure document at least 10 business days before you pay any money or legally commit yourself to a purchase. You can use these disclosures to compare a particular business with others you may be considering or simply for information. The disclosure document includes:

  • Names, addresses and telephone numbers of at least 10 previous purchasers who live closest to you;
  • A fully audited financial statement of the seller;
  • Background and experience of the business’ key executives;
  • Cost of starting and maintaining the business; and
  • The responsibilities you and the seller will have to each other once you’ve invested in the opportunity.
  • If the seller doesn’t give you a disclosure document, ask why. Verify the explanation with an attorney, a business advisor or the FTC by calling its toll-free helpline at 877-382-4357. Even if the business is not legally required to provide a disclosure document, you still may want one for your own information.

The Franchise Rule Compliance Guide (PDF) will provide you with complete information on rules and regulations affecting franchises.

Get all the facts

Before you buy a business:

Study the disclosure document and proposed contract carefully.

Interview current owners in person. (They should be listed in the disclosure document.) Visiting them in person may help you identify any that are “shills”— people paid to give favorable reports. Don’t rely on a list of references selected by the company because it may contain shills. Ask owners and operators how the information in the disclosure document matches their experiences with the company.

Investigate claims about your potential earnings. Some companies may claim that you’ll earn a certain income or that existing franchisees or business opportunity purchasers earn a certain amount. Companies making earnings representations must provide you with the written basis for their claims. Be suspicious of any company that does not show you in writing how it computed its earnings claims.

Sellers also must tell you in writing the number and percentage of owners who have done as well as they claim you will. Keep in mind that broad sales claims about successful areas of business-“Be a part of our $4 billion industry,” for example-may have no bearing on your likelihood of success. Also, recognize that once you buy the business, you may be competing with franchise owners or independent business people with more experience than you.

Shop around. Compare franchises with other business opportunities. Some companies may offer benefits not available from the first company you considered. The Franchise Opportunities Handbook, published annually by the U.S. Department of Commerce, describes more than 1,400 companies that offer franchises. Contact those that interest you. Request their disclosure documents and compare their offerings.

Listen carefully to the sales presentation. Some sales tactics should signal caution. For example, if you are pressured to sign immediately “because prices will go up tomorrow,” or “another buyer wants this deal,” slow down. A seller with a good offer doesn’t use high-pressure tactics. Under the FTC rule, the seller must wait at least 10 business days after giving you the required documents before accepting your money or signature on an agreement. Be wary if the salesperson makes the job sound too easy. The thought of “easy money” may be appealing, but success generally requires hard work.

Get the seller’s promises in writing. Any oral promises you get from a salesperson should be written into the contract you sign. If the salesperson says one thing but the contract says nothing about it or says something different, it’s the contract that counts. If a seller balks at putting oral promises in writing, be alert to potential problems and consider doing business with another firm.

Consider getting professional advice. Ask a lawyer, accountant or business advisor to read the disclosure document and proposed contract. The money and time you spend on professional assistance, and research-such as phone calls to current owners-could save you from a bad investment decision.

The FTC website has practical information about some common business opportunity scams; how to spot, stop and avoid them; and how to file a complaint if you think you’ve experienced a fraud: business.ftc.gov/selected-industries/franchises-and-business-opportunities.

More information about business scams or schemes is available.

Legal structure

Anyone conducting business in the State of Missouri under a name other than their own legal name (e.g., John Doe), must register the business name with the Missouri Secretary of State. Missouri law allows businesses to operate under four forms or organization:

  • Sole proprietorship
  • Partnership – general and limited
  • Corporation – C-Corp; S-Corp; Professional, Not-for-Profit; Foreign Corporation
  • Limited Liability Company – LLC

Each structure has its own advantages and disadvantages and there are many modifications and variations within these forms. The key to selection revolves around the concept of liability and taxation. You must decide which of these structures best suits your business. In choosing your business structure, consult with a qualified accountant and/or attorney who are familiar with your resources and objectives.

A description of the forms of organization and some of the advantages and disadvantages are discussed in Legal structures and Starting a New Business in Missouri. Choosing a particular structure does not necessarily determine how the business will be taxed.

The Licenses and registration checklist is a guide to help you with the licensing and registration requirements for starting your new business.

You can download forms on the Web at: sos.mo.gov/business/corporations/forms.asp or request them from the Secretary of State’s Office at 573-751-3200.

Taxes

Understanding the taxes that apply to your business and how to meet the legal requirements of those taxes is critical. Consultation with an accountant or attorney is advisable.

Tax considerations are essential during the formation of a new business and during its entire life. When a business is just starting out, it may have little or no income or assets and the choice of structure may not seriously affect its tax liability. However, as the business grows, the tax implications become more significant.

Doing Business in Missouri: Legal Formation identifies the state and federal forms that must be filed for different business structures and compares the tax liabilities for the most common business structures.

Tax responsibility includes federal, state and local taxes. As a business owner you will be responsible for income taxes, payroll taxes, property tax and other miscellaneous taxes.

Businesses making retail sales must obtain a Missouri Retail Sales License from the Missouri Department of Revenue. A bond, based on projected monthly gross sales is posted at the time of application. An application form (Form 2643) can be obtained from the Dept. of Revenue on the Web at dor.mo.gov/forms or by calling 800-877-6881. Those businesses buying wholesale or operating solely as a wholesaler should complete a Form 149 Sales/Use Tax Exemption Certificate (see: dor.mo.gov/forms/149.pdf) and provide it to their supplier showing the sale is exempt from sales tax.

For more information on taxes and access to printable copies of the required forms visit: Doing Business in Missouri: Taxes.

Hiring employees

Obtain a copy of  Employer’s tax guide  from irs.gov or call 800-829-3676. “Circular E” explains federal tax withholding and Social Security tax requirements for employers as well as containing current withholding tables for you to use to determine how much federal income tax and Social Security tax is to be withheld from each employee’s paycheck.

What is involved?

  • Once you begin paying salary or wages to employees, you must collect taxes from your employees. The primary taxes are: federal and state income taxes, Social Security (FICA) and Medicare taxes.
  • If you have not already done so, you must apply for a federal employer identification number (EIN), Form SS-4. The EIN number is used to identify your business on payroll and income tax returns, as well as for other federal tax purposes. Corporations and partnerships must file Form SS-4 even if they have no employees.
  • Each employee completes an I-9 Employment Eligibility Verification Form and a W-4 form.
  • Missouri require that all employers in Missouri report each newly hired employee to the Department of Revenue within 20 calendar days of hire.

For more information on your responsibilities as an employer, please contact your local Missouri Career Center. To locate the nearest office, check the phone book or call 888-728-JOBS (5627) or visit jobs.mo.gov/jobseeker/find-a-career-center.

For a complete discussion on hiring employees, your responsibilities, and access to the required forms, refer to: Doing Business in Missouri: Hiring Employees.

Business resources and guides

You may also find the following information helpful as you begin your business:

  • Starting a New Business in Missouri is an excellent publication on the process of starting and operating a business in Missouri.
  • Evaluating Your Business Idea is a simple questionnaire-formatted document that helps you think through the elemental considerations in starting a business.
  • Guide to Writing a Business Plan provides a short, but thorough introduction to the process of writing a business plan and provides a simple outline of the contents of a standard plan.
  • MissouriBusiness.net is a network of key business resource providers in Missouri. The website contains a vast array of helpful documents, links and information on starting and operating your small business as well as a calendar of upcoming training and educational events throughout Missouri. Find a business counselor near you.
  • The Missouri Environmental Assistance Center helps businesses improve business efficiency and save money through reducing or eliminating waste understand and navigate the complicated area of environmental permits and regulations. The website offers information on environmental compliance, pollution prevention and energy efficiency.
  • Contact your local (county, city, township) government offices early in the planning stages of your business. The requirement for local licenses and permits vary by county and city. Most cities, and some counties, require businesses to be licensed. Check with the city business/merchant license office and/or the county collector’s office for the requirements in your area. Be sure to check with the local city and/or county planning/zoning department to make sure that the site you have selected for your business is zoned to accommodate the activities of your business. These offices can be found in your local phone directory.
  • Missouri Lawyer Referral Service (www.mobar.org/LawyerSearch.aspx)
    • Kansas City: 816-221-9473 (Clay, Jackson, Platte & Ray counties)
    • St. Louis City & County: 314-621-6681
    • Springfield/Greene County: 417-831-2783
    • Rest of Missouri: 573-636-3635
  • Missouri Society of Accountants 800-959-4276  or missouri-accountants.com
  • The Missouri Society of CPAs 800-264-7966 or mocpa.org

See our ask a specialist article on Is franchising right for you?

For personalized help exploring business ideas, marketing, finance, management, technology, international trade, workforce development, growing your business or other business issues, contact a Small Business & Technology Development Center near you. Visit our full list of training courses to find an upcoming training seminar.