From the June 1998 issue of Startups

Choosing a franchise or business opportunity is as exciting-and confusing-as choosing a new car. There are hundreds to select from, each one shinier and more appealing than the next. But how do you look beyond the razzle-dazzle of the showroom to find out whether you're making a smart investment . . . or getting stuck with a lemon?

Whether you're shopping for a car or an opportunity, the secret to making a smart purchase is the same: Do your homework.

To begin, it's essential to understand the difference between a business opportunity and a franchise. The term "business opportunity" encompasses many types of businesses-including franchises. In general, a business opportunity is any opportunity that enables you to make money. Specifically, it refers to the sale of a product or service in which the seller promises buyers they will make a profit, that there is a market for the product or service, or that the seller will buy any unsold merchandise back from buyers.

While every franchise is a business opportunity, not every business opportunity is a franchise. To be a franchise, a business opportunity must meet three criteria set by state and federal law: The franchisee must pay a fee to the franchisor for the right to offer certain products or services; use the franchisor's name, trademark and service mark; and operate the business according to procedures set by the franchisor. A business that doesn't meet these three requirements is considered a nonfranchise business opportunity.

Franchises generally offer a lot of assistance, including hands-on training and ongoing help after start-up. But they also insist you follow rules and operating methods, and they typically require ongoing royalties and other fees. Most business opportunities offer more freedom; they let you run the business any way you want, and there are no ongoing royalties. That freedom means less support, though; in many cases, after the seller gives you some basic guidelines and enough materials to get started, you're on your own.

When conducting research into franchise companies, be sure to review descriptions of the training provided. Business opportunities don't usually provide hands-on training programs, but they may offer audiotapes or videotapes that explain how the business is run. Find out if the seller offers any type of phone or technical support in case you have problems.

Read All About It

Starting any business has risks, and those risks aren't entirely offset by the advantages of the franchise or business opportunity relationship. How can you be sure the company you buy an opportunity from is on the level?

If you're considering a franchise, you have an advantage: all franchisors must provide a comprehensive disclosure document that reveals key information about the investment and the seller. Called a Uniform Franchise Offering Circular (UFOC), this document must be delivered to you at either the first meeting to discuss the opportunity or 10 business days before you sign a contract or pay a fee-whichever is earlier.

The UFOC is required reading if you're considering a franchise. It consists of a detailed description of the franchise offering, the seller's audited financial statements for the past three fiscal years, and a copy of the franchise agreement and any related contracts. Review these documents with an accountant to see if the company is on solid financial footing.

The business backgrounds of the people running the franchise, and the litigation and bankruptcy histories of the company and its management, are also detailed in the UFOC.

Item 20 of the UFOC shows the growth or decline of the franchise system over the past three years, and lists active franchisees and those who have left the system in the past year.

Franchise fees and a detailed estimate of the total investment are also included, and you'll receive a breakdown of any financing the franchisor offers, as well as information on advertising and training.

Visit several franchisees in your area. (The UFOC provides a list of them.) Ask them what they like and dislike about the franchise and whether they'd buy it again knowing what they know now.

Biz Op Basics

What if you're considering a business opportunity? Half the states now regulate the sale of business opportunities. In these states, the seller usually must provide potential buyers with a copy of the company's registered disclosure document before the sale is completed. But many business opportunity sellers don't realize these laws apply to them, and opportunities that cost $500 or less are exempt.

To research a business opportunity, talk to others who have bought the opportunity (the seller should have a list); your lawyer and accountant; the Better Business Bureau; and Dun & Bradstreet, which can provide detailed information about a company's financial status.

Putting forth the effort to research an opportunity before you buy improves your chances of satisfaction after the purchase. Don't neglect this crucial step in the process.