DOB: Understanding Business Opportunity Investments - Investor Checklist

Understanding Business Opportunity

A Checklist
for Investors

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Before you buy, read the business opportunity disclosure document and contract carefully. Talk to an attorney or accountant, preferably one with experience in this area, before you pay any money or sign any document. Even the most experienced entrepreneurs - who perhaps can afford to lose more than you - never enter into an important business relationship without consulting a team of professional advisers. There is no reason why you should not do the same.

{*} Check With the Securities Division to See if the Business Opportunity is Registered

A list of registered business opportunities, including federally registered trademarks or service marks, is available on the Department of Banking Web site.

{*} Financial Statements

Carefully review the sellerís financial statements in the disclosure document.  An accountant or lawyer can help you to analyze them and tell you about the seller's financial strengths and weaknesses. If the seller is in a weak financial position, it may be selling business opportunities as a way to raise cash just to stay afloat and won't be able to provide you with effective support. Current financial statements will also tell you if the seller is really a one person operation or if the seller will be able to refund your money if there is a problem.

{*} Risk Factors

The disclosure document will summarize any factors that make the business opportunity highly risky or speculative.  Here are some examples of risk factors:  1) the business has had no profitable operations within the past 3 years; 2) the sellerís financial position is erratic; 3) the sellerís business type presents specialized risks; 4) the sellerís executive officers and directors were convicted of a crime or adjudged bankrupt; 5) the sellerís management lacks experience; and 6) the seller relies on key customers whose departure would have an adverse effect on the sellerís business.

{*} Prior Business Experience of the Seller and its Partners, Officers, Directors and Affiliates

How long has the seller conducted a business of the type you will be operating? Has the seller or its principals or affiliates had any prior business experience in related areas? Which ones?

{*} Seller's Prior Business Opportunity Track Record

The disclosure document will give you information on how many business opportunities have been operating within the preceding calendar year; the names, addresses and phone numbers of existing purchasers closest to you; the number of business opportunities that were voluntarily terminated or not renewed; the number of business opportunities that the seller reacquired by purchase; the number of business opportunities the seller refused to renew; how many business opportunities the seller cancelled or terminated during the term of the contract and after it expired; and the reasons for any reacquisitions, terminations and refusals to renew. Pay special attention to the number of business opportunities terminated during the past 3 years. An unusually large number may signal danger. In addition, if very few purchasers remain, your ability to obtain information based on the experiences of others will be hampered.

{*} Litigation History of the Seller and its Partners, Officers, Directors, Sales Representatives and Affiliates

The disclosure document will tell you if the seller or any of its partners, officers, directors, sales representatives or affiliates have been 1) convicted of a felony involving fraud; 2) defendants in an action involving fraud or the business opportunity relationship; or 3) subject to an injunction relating to fraudulent dealings or to the business opportunity relationship. Even if a lawsuit is only pending, too many claims against the seller and its principals may mean the seller has not been living up to its agreements.

{*} Insolvency or Bankruptcy of the Seller and its Partners, Officers, Directors and Affiliates

The disclosure document will also tell you if the seller or any of its partners, officers, directors or affiliates have filed for bankruptcy, been adjudged bankrupt or have been reorganized due to insolvency.

{*} Description of the Business Opportunity

What specific products and services will the seller provide to you? Is the product of high quality? Look for details on patents, warranties, frequency of repairs, consumer ratings and any state or federal restrictions on use of the product. Is there a market for the product? Ask for market studies to answer this question. If training is not fully explained in the disclosure document, ask about it. Request information from existing purchasers about their training. Also request information on the seller's marketing plan, if any. Will national advertising be provided?

{*} What Will Be Your Total Outlay (Cost)?

How much will you have to pay in initial fees, deposits and down payments? Will you have to make any payments to someone other than the seller? What for? Will you have any recurring expenses to run the business, such as royalty payments, rent, advertising fees, training fees and any additional equipment or inventory expenses?

{*} Seller-Assisted Financing

If the seller or its affiliate will offer you financing, find out the material terms and conditions.

{*} Operational Restrictions

Are you limited in what goods or services you can offer for sale? Must you only sell to certain customers? Are there any geographical limitations on the area where you may offer or sell goods or services? Geographical restrictions may limit your expansion plans. Will the seller provide you with territorial protection to prevent market saturation? How many hours and days per week must you remain open? Does the seller have any rules about closing for illness, death or vacation? How many employees, if any, must you hire? Do you need any special regulatory permits or licenses to begin operations? All of these are important questions.

{*} Business Opportunity Contract

Under what conditions could you terminate or modify the contract? Is renewal automatic? Does the agreement have any covenants not to compete?

{*} Site Selection

Will sites be selected based on a market survey? What will the seller do to help you pick an appropriate site? Would you be able to change the site if it turns out to be unsatisfactory? If the seller offers little help with site selection, think twice about buying.

  {*} Earnings Claims and Projections

The disclosure document will tell you how many purchasers over the past three years achieved earnings in the amount or range specified by the seller. In addition, the disclosure document will explain the bases and assumptions underlying sales and earnings projections.

  {*} Multi-Level Marketing Considerations

Do not be afraid to ask questions of the MLM company and participating distributors, especially those with whom you will share a common upline. How many levels of downlines can earn you bonuses and commissions? How long does it usually take for the company to pay its participants? Are there any strings attached to your receiving overrides and bonuses? For example, must you attend a national sales convention at your own expense to qualify?

Need More Information? Contact the Securities Division.

Publication last revised February 3, 2010

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