Part of what makes this country great is the opportunity we have to pursue the American Dream of owning a business and realizing the fruits of our labor. If you find yourself thinking about owning your own business--whether it's a single shop or an empire--you've taken the first step on the path to experiencing the American Dream for yourself.
It's not necessarily an easy path to follow. Being successful at this dream is going to require planning, resourcefulness, ambition, desire and a ton of perseverance. Successful business owners know how to make decisions, delegate work and take responsibility for their actions.
You'll know if you're cut out for business ownership by answering the following questions: Do you enjoy working with people? Are you focused and decisive? Do you like solving problems? Are you willing to work hard? Can you set and meet personal goals? Do you understand financial concepts? Would you like to be your own boss? If you answered yes to these questions, you might be good business-owner material.
As challenging as starting your own business can be, the good news is that you don't have to travel this path alone. Others have gone before you, and many are willing (for a price) to help you learn from the lessons they learned in their own quest to achieve the American Dream. These are the successful entrepreneurs who have set up either a franchise or business opportunity (biz opp), giving others a methodology that can ease their way to successful business ownership. Here's what you should know about buying a franchise or biz opp.
Franchise vs. Biz Opp
First, let's start with what franchises and biz opps have in common. Both make the same basic initial offer to prospective participants: assistance in setting up a business and all the initial training you need to get things running. For this assistance, they normally charge an upfront fee that ranges between $15,000 and $30,000. In both cases, the company is typically contributing startup assistance and a method of operation, while you are contributing your capital and time to manage and run the business.
There are a few key areas where franchises and biz opps differ, however. A franchise needs a common brand or trademark under which the business will be operated, while a biz opp usually doesn't have any such requirement. Also, a franchise always assumes an ongoing relationship between the parties, including operational or marketing support services, whereas a biz opp usually doesn't. In any case, if the opportunity has all of these system components (required fees, a common brand and an ongoing relationship), it's a franchise. If it's missing one or more, it may be a biz opp.
In a franchise, you usually sign a contract with a franchisor covering a period of 10 to 20 years and agree to follow the franchisor's strict guidelines in the operation of the business. In return, you get access to the brand, a proven business model, comprehensive training and ongoing support. The franchisor makes money from the franchisee's royalty payments based on the overall sales of the franchised unit.
With a biz opp, you pay a fee for assistance and advice, but you own the business outright and operate it under a name of your choice. The biz opp company makes its money by delivering the business system, training, equipment and/or services to you. In some cases, the seller may also make residual income for the ongoing sale of products or services, but generally, the relationship is over once the purchase is finalized.
The advantages of a franchise relationship relate to risk reduction and safety. Because franchisors rely on successful franchisees for royalty revenue, they typically make every effort to provide franchisees with valuable ongoing support, continued training and opportunities to learn from other franchisees. A franchise system that uses a common brand also allows for growth in business value, as the brand and trademarks develop through common usage.
The advantages of a biz opp are that you don't have a lot of rules and restrictions on how you operate the business, so you have the flexibility to run it as you choose. You also don't have any ongoing royalty payments, so your margins may be higher than a franchise's.
It's also important to note that both franchises and biz opps are regulated by various federal and state laws. There are numerous requirements related to the registration of either kind of opportunity as well as mandated disclosures of information to prospective buyers.
What's Best for You?
To answer this question correctly, you'll need to know the answer to two additional questions: First, how comfortable are you with taking a risk rather than doing whatever you can to minimize it? Second, how comfortable are you with following someone else's system rather than being able to determine your own path?
The whole idea behind a franchise is to leave as little to chance as possible, therefore minimizing the risk to a franchisee operating the business. If that means franchisees have far more restrictions for operating the business, or if it means they may not have as much top-end margin potential, so be it.
Many people thrive in the franchise environment, but a true entrepreneur may often feel stifled and frustrated. It's important that you know yourself well enough to judge how to balance the amount of risk you are comfortable with and the amount of freedom you require to be happy. Then you'll have a good idea of which type of business structure is the right one for you.
If you're still not sure, a final piece of advice is to take a little time to look into a few examples of each type of business. You'll soon see the differences and will probably find yourself drawn to one option over the other; that's probably the one for you.
The secret to finding a great opportunity is following this three-step process: First, start with some self-examination to help clearly define what you're looking for. Second, decide if you want to focus on a franchise or a biz opp structure. Third, find the right company for you. Here's how to complete each step.
1. The Self-Examination: The key to this step is focusing on business characteristics rather than the product or service that the business offers to consumers. The simple fact is that in many businesses, the owner has little or nothing to do with the actual delivery of the product or service to the customer, so you need to focus on the role the owner plays to make sure it matches what you want from business ownership.
The most effective way to conduct this step is to ask yourself a few questions. Write the answers down because they'll form the basis of the model you can use to evaluate any opportunity to make sure it meets your basic needs and requirements. Some of the questions you'll want to ask yourself include:
- Why do I want to own a business?
- What result do I want to achieve in my life through business ownership?
- What are my income goals and the time frame for accomplishing them?
- Because the owner is often the key promoter of a business, how comfortable am I in a sales role?
- How comfortable am I with managing employees, particularly large numbers of minimum-wage employees in a high-turnover environment?
- What hours do I want to work?
- How much can I comfortably invest in a business opportunity?
- How will I pay personal living expenses while the business grows past its initial break-even point?
- What is my exit strategy and time frame for the business?
2. Franchise or Biz Opp: We've dealt with the parameters for answering this question in detail above. Now it's time for you to finalize your decision so you can move forward and start looking at individual companies.
3. The Right Company: The secret here is to use broad filters to eliminate most opportunities very rapidly so you can narrow in on a few potential candidates.
Find a broad, general listing of franchises or biz opps from a publication (such as Entrepreneur's annual Franchise 500� in the January issue or online at entrepreneur.com/franchise) or on the internet. You'll usually find that these lists of opportunities are organized by industry segment or subsegment, meaning all taco businesses or home-cleaning companies are listed together.
As you go through the list, looking at industry segments, take a minute to think about what you know of these types of businesses from your experience as a customer. Use your filters first to eliminate whole segments that don't match your interests, and then we'll go through the list a second time to narrow down the search even further.
The first filter we use--besides your personal preference--is financial. After determining what you have available to invest, you can quickly eliminate all industry segments of opportunities that require more capital than you have to work with.
The second filter relates to employees. Many prospective business owners don't want to manage large numbers of minimum-wage employees. If that's your case, we can eliminate many of the businesses you might otherwise look into.
The third filter is the hours you want to work. In any business, you'll want to be there during the busiest times. For each business you're considering, ask yourself: When does the cash register ring the loudest? If the answer is evenings and weekends and you want to work normal business hours, then you don't have a good match.
The final basic filter relates to your comfort level about sales. This one may not be quite as obvious as the others, but give each remaining industry segment some thought in relation to this criterion. If you don't want to spend time doing heavy sales activities, but you realize that this is a key role for the owner, the segment isn't right for you.
At this point, you've probably eliminated most of the companies on your broad list and narrowed your scope down to a much smaller group. Carefully think through each of the remaining segments, and ask yourself if there's some other reason that a certain segment is simply not going to work for you.
Of the remaining segments, determine the three best possibilities, and pick one company to contact from each. Start gathering information from these, and look for reasons to eliminate them based on the key criteria you set for yourself earlier.
If you find an opportunity during your research that's not compatible with the characteristics you outlined, determine whether it's unique to this company or common to the segment; then eliminate either the company or the entire segment. Using this method, you'll rapidly narrow down the list to a very small number of companies that have great potential.
To help you in your research, any franchise or biz opp should provide a required federal disclosure document, or FDD. The FDD contains a number of mandated sections that will give you information about the history of the company, the success rates of its units, any of its litigation or bankruptcy history, its officers and directors, and any formal earnings claim information it chooses to make available. Make sure you ask for and carefully review the FDD of any company you're considering.
In addition, the best source of information for any franchise or biz opp is the current operators. Make sure you get a list of all current operators so you can call some of them to check references and learn their opinion on every aspect of the franchise or biz opp. A franchise is required to disclose this information, but a biz opp isn't. A word to the wise: Any biz opp that's unwilling to disclose its existing operators to a serious candidate for reference checks should be avoided like the plague, because there's no good reason to withhold this information other than fear of what the candidate might hear from current operators.
How will you know it's the right time to buy? That's the big question you'll face at the end of this whole process. The answer, though it may sound simplistic, is that you'll know it in your heart.
When you get to the end of your investigation into a franchise or biz opp, ask yourself the following:
- Does this opportunity match all the key characteristics of the owner role that I've identified for myself?
- Does this opportunity have people behind it who I like, trust and feel confident about in terms of them sharing my values?
- Does this franchise or biz opp have strong potential for me when it comes to meeting my financial and lifestyle goals?
If your answer to each of these questions is yes, then you've found the right opportunity for you. Trust your gut and move forward immediately to begin realizing your American Dream.
Jeff Elgin is the "Buying a Franchise" coach at Entrepreneur.com and has more than 25 years of experience in 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 matches their needs. He was assisted in the research and writing of this article by Terrie Hall of FranChoice.