What is a Business Opportunity bond?
Business opportunity bonds are a subset of the broader financial guarantee bond category that must be filed with the government agency (city, county, or state) responsible for regulating business franchising or business opportunity sales.
Business opportunity bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as a business opportunity bond, will also be referred to as the “surety company” or the “bond company”. Business opportunity bonds refer to the licensed business opportunity seller as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Business Opportunity bond required?
Sellers of business opportunities or franchises are required to purchase financial guarantee bonds by state and local statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from a business franchisor breaking franchise license law. The surety company provides the government a guarantee (the surety bond) that the government will receive payment for financial damages due to a violation of the statutes and regulations referenced in the bond form up to a limit specified in the bond (“penal sum” or “bond amount”). Ultimately, licensed business opportunity sellers are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension.
Business opportunity bond violations triggering a bond payout may include a business opportunity seller defrauding a purchaser of a business opportunity.
How much does a Business Opportunity bond cost?
Business opportunity bonds generally cost between 1.5% and 10% of the bond limit.
Example: $10,000 Business Opportunity Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|680 or above||1.5%||$150|
|499 or below||10.0%||$1,000|
The actual cost of a specific business opportunity bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the business’s license history, experience and creditworthiness.
Is a Credit Check Required for Business Opportunity Bonds?
Credit checks are required for most business opportunity bonds.
How does the wording in the bond form impact the cost of a Business Opportunity bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and licensed business opportunity seller (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the principal via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a business opportunity bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 Business opportunity bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Business opportunity bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the licensed opportunity seller and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the opportunity seller failing to pay premiums due, claim payouts, or material changes in the owner’s credit score. Business opportunity bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Business opportunity bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.