May 11, 1997
Donald S. Clark,
Re: 16 CFR Part 436
In response to the Commission's solicitation of public comment on revisions to the Franchise Rule, we want to address the proposed definition of "business opportunity" as set forth in Part B.2.b. as follows:
We believe this definition is too broad. It could have the unintended consequence of including both ordinary sales transactions and routine dealership relationships.
Example 1. A new business desires to sell widgets and approaches the manufacturer to purchase widgets. The manufacturer may routinely provide its customers with credit terms, point-of-sale advertising materials, general advertising of widgets and/or training for its customers' employees. Has the manufacturer entered into a business arrangement which consists of the payment of consideration for the right to sell goods and more than nominal assistance to an entity incident to the operation of a new business?
Example 2. The manufacturer of widgets desires to use distributors to sell its product. A new business seeks to become a distributor. Distributors are provided support including credit, advertising, free samples, training, and an exclusive territory. Does this dealership agreement constitute a business arrangement which consists of the payment of consideration for the right to distribute goods and more than nominal assistance to an entity incident to the operation of a new business?
As the proposed definition is worded, we believe the answer to the question in both examples would be "yes." However, we doubt either situation is what we do, or should, think of as a "business opportunity."
Also, the phrase "more than nominal assistance" is so vague as to provide little guidance in determining whether one is engaging in the sale of a business opportunity. We are not sure the solution is to raise the required assistance to something more than "nominal." Even if "substantial" assistance were required, the vagueness would cause confusion for businesses which would lead to a trap for the unwary or unnecessary expense to clarify a particular situation.
Unfortunately, we do not have a substitute definition to propose. However, we believe the focus of the definition ought to be more on the nature of what is being sold. In any event, we believe this is an area that requires more study and input before being included in the Franchise Rule.
As requested, we are enclosing a 3½ disk containing this comment.
Ernest R. Higginbotham