Before purchasing any business opportunity, the Washington State Department of Financial Institutions recommends you do your research.Verify Salespeople and Business Opportunity Are Registered with the Washington State Department of Financial Institutions
Verify that the salespeople and business opportunity itself are registered with the Washington State Department of Financial Institutions.This may save you trouble later on. Contact us at 360-902-8760 or 1-877-RING DFI (1-877-746-4334).
Consider if the Business Opportunity is Right for You
Before investing review our questions to ask before investing in a business opportunity.
Thoroughly Read Disclosure Document and Contract
Before you buy into a business opportunity, make sure you thoroughly read the disclosure document and contract. Consult an attorney or accountant, preferably one with experience in this area, before you invest any money or sign any documents.Even the most experienced business people never enter into an important business relationship without consulting a team of professional advisers.
Examine Financial Statements
Carefully examine the financial statements in the disclosure document. Have an accountant or attorney help you. The financial statements will tell you the promoter's strengths and weaknesses.
Review Risk Factors
The disclosure document will outline any factors that may make the business venture risky or speculative. Examples include: no profitable operations within the past 3 years; an erratic financial position; prior business failures; if any of the management team has a criminal history; if the promoter has declared bankruptcy; lack of experience on the part of the promoter's management.
Research Seller's Prior Business Track Record
Some of the information the disclosure document will give you is how many businesses have been operating within the preceding calendar year; the names, addresses, and phone numbers of existing purchasers; the number of businesses terminated; the number of businesses reacquired by the seller. Pay particular attention to the number of businesses terminated during the past 3 years. A very high number may be a red flag.
Review 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:
- convicted of a felony involving fraud;
- sued for fraud in an action or the business opportunity relationship;
- subject to an injunction relating to fraudulent dealings
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.
Get Detailed Description of the Business
What specific products and services will the seller provide to you? Is it high quality? Look for details on patents, warranties, frequency of repairs, consumer ratings, and any state or federal restrictions on the use of the product. Is there a market for the product? Ask for a market study. Is special training necessary? Will the seller provide the training? Is the product or service seasonal or cyclical?
Determine How Much the Business Opportunity Will Cost You
How much will the product or franchise cost you? Are there initial fees, deposits, or down payments? Will there be others to whom you will have to make payments? What for? Will you have recurring payments or expenses to the seller such as training, rent, additional equipment or inventory?
Review Seller Assisted Financing Carefully
If the seller or its affiliate will offer you financing, find out the material terms and conditions. Have an accountant or attorney go over the contract.
Understand Operational Restrictions
Are you limited in what goods or services you can offer? Are you limited to certain geographical areas? Is your territory protected? Will you be required to be open certain hours and days? Will you need special regulatory permits or licenses? Are there other restrictions such as how many employees you must hire?
Review Contract Carefully
Can you terminate or modify the contract? What are the conditions? Is renewal automatic? Can you compete with your former business if you terminate or are terminated?
Consider the Site Selection
Will sites be selected based on a market survey? Will the seller help you pick an appropriate site? Will you be able to change sites if the site is not satisfactory? Site selection, especially for a franchise, is very important. If the seller offers little help, think twice about buying.