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Finding The Right Business

Buying a Franchise Versus a Business Opportunity

How to tell the difference between a franchise and biz opp and determine which is the better fit for you.
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

America is truly the land of opportunity. You can start your own business from scratch or choose from thousands of franchises and business opportunities, in practically any field you want.

In fact, there are so many different opportunities and alternatives available that it's sometimes difficult to figure out which is the best path to follow. Once you decide you'd like assistance in starting, you still need to understand the differences between franchises and business opportunities and how to choose which is right for you.

Franchises and biz opps are fairly similar, but they do have a few distinct differences, in four key areas:

1. Common Brand and Operating System. One of the tenets of a successful franchise system is that all units operate under a common brand and operating system. This is how a consumer knows a Big Mac will be the same in Ohio or California. A franchise system makes a concerted effort to ensure that every operator is doing things the same and every unit is supporting and reinforcing the brand.

In a biz opp, there's typically no requirement to operate under a common brand, though some biz opps do let you use their brand if they so choose. In addition, since the focus of a biz opp is on setting you up for operation, very little consideration may be given to imposing a common operating system after the business opens. You normally get extensive suggestions about the most effective way to run your business after opening, but they are suggestions rather than rules.

2. Ongoing Support. A franchise typically has an ongoing commitment to support you over your entire tenure in the business. These support programs usually involve structured periodic contacts with dedicated support personnel for marketing, staff training, technology and virtually any other aspect of ongoing operations.

Though a biz opp may also offer you ongoing support, the process is usually very informal and not based on any contractual commitment. Usually it is demand-driven, as the biz opp owner responds to requests for assistance. They typically don't have dedicated staff for ongoing support needs and won't conduct such activities on a proactive or periodic basis.

3. Ongoing Fees. As a franchisee, you typically have a contractual commitment to pay the franchisor ongoing fees (royalties) in exchange for the continuing right to use the brand and operating system. These royalties also help the franchisor pay for the dedicated staff and programs they use to provide ongoing support to you. Royalties can be a fixed periodic amount or may be expressed as a percentage of your sales.

A biz opp usually doesn't have any such ongoing payment commitment. In fact, the presence of an ongoing payment obligation is one of the legal tests used to determine if an opportunity is a franchise vs. a biz opp.

4. Legal Disclosures. The final key difference between these two types of opportunities is related to the legal restrictions associated with the sale of the business to you. These typically involve complying with both federal and state laws and regulations in terms of required disclosures made to you during your investigation phase of the process.

In a franchise, these requirements are very stringent and center around a document called the Uniform Franchise Offering Circular (UFOC). This document contains a wealth of information about the company and the opportunity being offered, including the history of the operation and key employees, any litigation or bankruptcies, all fees and costs, all rules and restrictions related to the business operation and the audited financial statements of the franchise company.

A business opportunity is not required to prepare and deliver any document like the UFOC, though it may have to meet state requirements related to disclosure. In any case, you'll typically receive far more legal disclosure information from a franchise than a biz opp. This doesn't mean one is better than the other--it just means you're probably going to have to do more of the work yourself to make sure you have the information you need from a biz opp than you will from a franchise.

You can safely assume that your initial and ongoing fees associated with a franchise will be greater than for a biz opp. If you choose a good franchise, the tradeoff is that your risk of failure should be lower and the profit you make in the long term should be higher. If you don't believe that to be true, there's no reason to pay the higher fees associated with a franchise.

A biz opp also allows you to change the business into whatever you want it to become--rather than being restricted to a common brand and operating system. If you are a true entrepreneurial type, you might find that a biz opp is more attractive to you because of the flexibility you'll have in the beginning and as you operate the business over the years.

There is no right answer in terms of which strategy is better--it completely depends on the business model and your philosophy about what you want to accomplish. A careful and thoughtful analysis of your personal goals for establishing a business should help steer you in the direction of the type of opportunity that is best for you.

As always, talk to a significant number of existing owners to hear their experience in detail before buying any franchise or biz opp. The time spent in your research of the opportunity is the most valuable investment you'll make in ensuring your best chance for success.

 

Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.

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