Q: I've developed a great business model and have tested it in three prototype units I've established. It works like a charm, and I'd like to expand the business by getting other people involved in order to grow it rapidly. I thought about franchising it, but there seem to be so many regulations that I'm not sure about this. I have a friend who said I should just expand as a business opportunity without being a franchise to save money and hassle. What's the difference between these two strategies?
A: When most people analyze the differences between these two strategies, they find they are different in three key areas:
Ongoing Support. A franchise typically involves an ongoing support commitment from the company to help the person who gets involved in the business. Though this is sometimes also true in a business opportunity, most do not involve a commitment to provide this type of support.
Ongoing Fees. A franchise typically involves an ongoing commitment on the part of the person entering the business to pay fees or royalties for the continued right to use the brand and operating system. A business opportunity usually does not have any such ongoing payment commitment.
Common Brand. A franchise typically involves a requirement that the person entering the business will operate under a common brand with all other franchisees. A business opportunity usually does not have such a branding structure for the operator.
In a business opportunity, the typical approach is to prepare material for supporting someone who wants to enter your business. This material is designed to help them get up and running in the business, but does not assume an ongoing relationship or a common brand or operating system. As a company in a business opportunity, you would typically charge a one-time fee for this assistance and then the person who gets into the business would be on his or her own after some initial training and support from you.
In a franchise, the typical approach is the same, except for the assumption of a common brand and operating system. In addition, there is an assumption that support services will be ongoing, so the company has to create the overhead associated with support staff (hence, one of the justifications for an ongoing fee).
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. You can safely assume that the initial investment in franchising is going to be greater than for a business opportunity, but the long-term revenue potential should also be significantly greater due to the ongoing revenue component.
It is also critical to understand that there are laws that govern the activities of someone using either strategy to grow a business. As a general rule, a franchise structure is more highly regulated, but you need to understand that many states have business opportunity statutes as well.
It is fairly easy to assume you're setting up a business opportunity, only to find you've crossed the line and are actually considered a franchise. Though less likely, it is also possible to think you've set up a franchise, and yet some business opportunity statues apply to your operation.
The only real safe option is to work very closely with an attorney who specializes in this type of business structure setup. The attorney will explain the differences between the laws concerning both strategies and make sure you are complying with all applicable statues. Your first step in terms of proceeding should be to find the attorney you are going to work with and then analyze these differences in-depth with this person.
Jeff Elgin is the "Buying a Franchise" coach at Entrepreneur.com and has 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.