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Franchises vs. Business Opportunities

Franchises vs. Business Opportunities-1

 

Business opportunities (biz opps) and franchises are two ways to start a business without having to start from scratch, offering prospective business owners a proven system to operate with. While they are similar, and have many overlapping features, they have distinct differences that should be acknowledged before an entrepreneur signs on the dotted line to proceed with either.

 

Business Opportunities
biz_people.jpgA business opportunity is defined as the sale or lease of any product, service, equipment, etc. that will enable the purchaser to begin a business.

 

Business opportunities cover a broad spectrum of careers, and include the following:

  • Turnkey Operations: A business model where a product or service is ready to be sold or provided immediately after the purchase without additional input by the purchaser.
  • Distributorships: An independent agent has the right to sell and market another company’s products to dealers, but cannot use that company’s name as part of their own.
  • Dealers: Similar to distributorships, except the sales are to consumers and retailers.
  • Network/Multi-level Marketing: An agent sells products directly to consumers and recruits others into the program as well. Usually, a commission is paid to the agent on their own sales and the sales of the agents they have recruited into the program.
  • Trademark/Product Licenses: A company grants a licensee the right to use the seller’s trade name along with their methods, products, equipment and/or technology.
  • Rack Jobbers: A company sells their products through store racks that an agent services. The company maintains the racks, and the agent is in control of the inventory and how to display the merchandise. Periodically, the agent will notify the company of what was sold, and the company will send a commission check.
  • Vending Machine Routes: Similar to rack jobbers, except the agent (vendor, in this case) must pay for the machine and the product. The agent also has to service the machines him- or herself.
  • Work from Home Opportunities: A company contracts an agent to do work remotely, most often by computer. Examples include taking surveys from home, selling merchandise on eBay, data entry work, affiliate marketing, and many more.

 

With the purchase of a business opportunity, the buyer owns the business outright and can customize all aspects of the business to their tastes. When a potential business owner contacts a person (or entity) selling a business opportunity, they are contracting with that licenser for a business system including training, equipment or a service method that the licenser has been through the growing pains with and has made profitable. Traditionally, once the purchase is finalized, and training – if applicable – is completed, the relationship is over.

 

Franchises
A franchise is defined as the right or license granted by a company (franchisor) to an individual or group (franchisee) to market its products or services in a specific territory.

 

Three common types of franchises are:

  • Business Format: Probably the most popular form of franchising. The franchisor licenses their brand to a franchisee for use with a predetermined way of conducting business.
  • Product: The franchisor grants the franchisee permission to sell/distribute a product using their logo, trademark and trade name.
  • Manufacturing: The franchisor permits the franchisee to manufacture their products (i.e. food) and sell them using their trademark and name.

Business women shaking hands

 

When the purchase of a franchise is made, the purchaser is required to comply with strict guidelines and rules regarding the operation of the business unlike in a business opportunity. These guidelines are in place to protect others within the system and maintain brand consistency. And unlike most business opportunities, costs paid to the franchisor don’t end with the initial sale. Royalty payments are collected for as long as the franchisee owns their franchise. In exchange for these payments, the franchisee will receive continued support, such as marketing assistance.

 

In acquiring a franchise, the potential franchisee goes through what is traditionally a much more extensive vetting process to complete the deal. In addition to an interview, a potential franchisee will first have to complete an application that details his or her background and work experience to assess how he or she would fit into the franchise’s system, and provides detailed financial information to find out if he or she can sustain the business until it is profitable if necessary. Then, assuming the potential franchisee is deemed a suitable candidate, the franchisor will present a franchise contract that should be gone over with legal counsel before it is agreed to.

 

The franchisor also makes several disclosures upfront. Franchisors are required by the Federal Trade Commission (FTC) to present potential franchisees with a Franchise Disclosure Document (FDD) at least 14 days before a contract is signed. A FDD is a document that outlines the history of the business, all the franchisees in a franchise’s system, turnover rates, terminations, fees, rules, restrictions, and numerous other items pertaining to that particular franchise.

 

Risks of Both
Just because franchises currently have more federal regulation than other business opportunities doesn’t mean that they are without risk. There are several risks to owing a franchise as well. For instance, in the event of a dispute, current laws provide little support or protection to a franchisee from the FTC. There can also be hidden expenses for equipment or materials needed to run the business that aren’t specified or made clear in the FDD that mount up in addition to the largely steep franchise fees, which are non-refundable.

 

Because business opportunities aren’t as closely regulated as franchises, the entrepreneur must personally take precautions to avoid scams. To combat the risks of scams, the FTC has taken steps to aggressively crackdown on businesses that have provided false claims in recent years. They are also working to educate those looking into these business opportunities with a website with tips on spotting a potential fraud, and ways to contact them if you believe you’ve been misled by a company offering bogus business opportunities.

 

Comparison Chart
The following chart further explores the main differences between the two entities.

  Business Opportunity Franchise
Costs Typically less expensive than a franchise, with few requiring royalty payments. Higher upfront costs with required royalty payments to the franchisor. Most often, potential franchisees need to gain financing assistance to pay the upfront costs, which can be quite steep.
Structure Less structured operations allowing for owners to implement the systems that work best for them along with easier customization of the business. Very structured with little to no leeway in deviations allowed from the established business model. This includes items such as daily procedures and quality standards.
Ongoing Support Usually there is little contact between the seller and purchaser of the business opportunity after the business is set up. Any support is usually informal and not based upon a contract. Franchisors typically provide training, marketing support and other items to franchisees as a part of their agreement.
Legal Regulation Varies from state to state. Usually the licensee must provide some sort of disclosure to the purchaser. Franchisors must provide a FDD to the franchisee at least 14 days before any agreement is signed/finalized.

Risk - Cost - Effort

Picking the Right One for You
To sum it up, all franchises are business opportunities, but not all business opportunities are franchises. Figuring out what kind of entrepreneur you are and what you’re looking for is important for deciding which kind of business you should pursue. Both are good for potential business owners that don’t have a unique product or service to bring to the marketplace, but still want to run a business day-to-day. The big differentiator is how much support you want. If you’re simply looking for a jumpstart and desire more flexibility, a business opportunity is probably the route for you. If you’re looking for consistent support, and can handle restriction in the procedures of your business, maybe a franchise is the path for you.

 

Wrap-up
Regardless of whichever one you decide to pursue, here are some tips to help you along the way:

  • Contact the state attorney general’s office for background information on the business
  • Find and contact current and former owners who have been through the process with the business you are seeking to start
  • Recruit experts – lawyer, accountant, realtor (for zoning considerations) – to help ease the burden
  • Read through all documents thoroughly before signing anything

 

No business venture is immune to failure without a sound business plan and a lot of hard work. For these reasons, do extensive research, ask a lot of questions, particularly when it comes to net earnings, temper your expectations, and work hard at making your business a success.


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