What Franchisors and Business Owners Need to Know About the Texas Business Opportunity Act

The Texas Business Opportunity Act (TBOA) regulates the advertisement and sale of franchises and other types of business opportunities. The Act requires businesses to file disclosure statements relating to those business opportunities and prohibits certain deceptive practices. Business owners seeking to expand by franchising or offering investment in a business opportunity must understand that these activities are regulated both by the TBOA and the Federal Trade Commission (FTC). The TBOA and FTC regulations have many similar provisions, but the TBOA covers some types of business opportunities that the FTC regulations do not cover.

What businesses does the Act affect?

The TBOA only applies to the advertisement and sale of a certain category of business opportunities. To fall within the purview of the Act, a business opportunity must require the investor to pay at least five hundred dollars for products, supplies, equipment, or services to start the business, and the seller must promise that the investor is likely to make enough profits to get the initial investment back. In addition, the TBOA only applies if the seller promises to provide or find the location for the business, to provide a sales, production or marketing program, or to buy back the products that the investor produces.

What does the Act require?

If a business opportunity falls within the TBOA's definition, the seller is required to register with the Secretary of State and file a disclosure statement with detailed content and form prescribed by the Act before advertising or offering the opportunity for sale. In addition, the seller must provide the disclosure statement to potential buyers at least ten days before the buyer signs a contract or pays any money.

The disclosure statement must include a list of information including the following:

• the names and addresses of the owners of the business,
• the periods of past sales of business opportunities,
• a detailed description of the services that the seller will perform for the buyer,
• financial statements of the business,
• the date that products, equipment, or supplies will be delivered,
• data substantiating statements of sales or earnings,
• legal action history,
• information regarding the bankruptcies of the business owners,
• a copy of the contract that the business usually uses for such business opportunities.

In some cases, businesses are required to take out a surety bond, establish a trust account, or obtain a letter of credit to back up guarantees that the business will succeed.

What does the Act prohibit?

The TBOA also prohibits certain false or deceptive practices relating to the advertisement and sale of business opportunities. For example, omitting to disclose a material fact, promising undocumented results, and making statements inconsistent with the required disclosure statement can be violations of the Act. Business owners should be very careful with the language they use in promotional literature as well as oral statements.

How is the Act enforced?

If a business fails to comply with any of the requirements or violates any of the prohibitions of the TBOA, the business has also violated the Texas Deceptive Trade Practices Act. Such a violation renders a business liable for civil and criminal penalties that can easily reach tens of thousands of dollars.

How does a business ensure compliance?

Businesses that are considering expanding by offering franchises or another type of business opportunity are well advised to consult with a business attorney to ensure that they are in compliance with the many detailed provisions of both the Texas Business Opportunity act and Federal Trade Commission regulations. An attorney who is familiar with these laws can help a business draft a proper disclosure statement and advise the business on how to avoid risks when promoting a business opportunity.