World of Opportunity Franchise, business opportunity or MLM? What you don't know can hurt you. Here's how to choose the entrepreneurial investment that's right for you.

Being an entrepreneur means constantly making choices. Goodbusinesspeople weigh the options, make a decision and move on.Great businesspeople measure the advantages and disadvantages ofthe options against their business plans, make the right decisionand move on.

You know you want to go into business, but you're notinterested in starting from scratch; instead, you want to researchinvestment packages available to you. Here are your options: abusiness-format franchise, a business opportunity venture or amultilevel marketing package. Each has advantages anddisadvantages. Before you decide which route to take, understandthe structures of the various formats. Their pluses and minuses maymake all the difference.

Franchise Facts

Franchising is defined by state and federal laws as a commercialrelationship in which three factors are present: a licensedtrademark, a prescribed marketing plan, and the payment of afranchise fee for the right to participate in the program. Whenthese three factors exist, the relationship is regulated as afranchise by state and federal laws.

In business terms, a franchise is a continuing commercialrelationship in which the buyer, or franchisee, owns a business butagrees to operate it using the trademark and business systemdeveloped by the franchisor. The franchisor provides the franchiseewith detailed training and assistance to start and run thebusiness. In exchange, the franchisee pays an initial fee,typically $5,000 to $25,000, as well as an ongoing weekly ormonthly royalty fee of anywhere from 3 percent to 8 percent of hisor her gross sales.

The greatest strength of franchising is its ability to bringindependent retailers together using a single trademark andbusiness concept. The benefits of this affiliation are many: brandawareness, uniformity in meeting customer expectations, the powerof pooled advertising and the efficiencies of group purchasing.

For the individual owner, there are several advantages tofranchising. The ever-present risk of business failure is reducedwhen the business program has already proved successful in themarketplace; the use of an established trademark saves the businessowner the cost of creating and advertising a name that customerswill recognize; and the advantages of group advertising andpurchasing make operations more profitable. In addition, ongoingtraining creates an instant operational expertise that wouldotherwise need to be acquired through trial and error. Also, withfranchising, expansion seems to come more naturally. Operating asuccessful franchise may quickly lead to building a second and thena third business, and so on. Fortunes have been built this way.

Franchising, however, is not for everyone. Fiercely independententrepreneurial types (you know who you are) may chafe under thestrict operational requirements and specifications of a franchisedbusiness. If things have to be done your way, you may want to headin another direction.

Remember that some franchise systems are better than others. Aweak franchise program will not train you well to handle thechallenges of the business, will not do a good job of assisting youwhen problems arise, and will not make the best use of youradvertising dollars.

If you're considering buying a franchise, don't let wildexpectations influence your decision. While franchising is designedto put people into business who have never owned a business before,the excitement of ownership can create an impulse to move forwardwithout proper planning. If you rush headlong into buying afranchise expecting to boost your current working salary, but theearnings don't allow you to pull out more than half your formersalary, you will be one unhappy camper. Work with a good CPA toprepare a cash-flow projection for the business before you take theplunge. Know how long it will take to break even and turn a profit,as well as the amount of salary you'll realistically be able topay yourself.

Road Map

Federal and state franchise laws require a franchisor to provideeach franchise buyer with an offering prospectus, otherwise knownas a Uniform Franchise Offering Circular (UFOC). This documentprovides a detailed description of the franchisor as well as thefranchise program being offered, and it's required reading ifyou're serious about investing in a franchise.

Key sections in the UFOC will answer these questions foryou:

• What exactly is the franchise company all about, and how longhas it been in this business? (Items 1 and 2)

• What is the company's litigation and bankruptcy history?(Items 3 and 4)

• How much will the total investment be, and what are the feesinvolved? (Items 5, 6 and 7)

• Do I have to buy supplies, inventory or product from thefranchisor or from third parties designated by the company? (Items8 and 16)

• How much training will I receive? (Item 11)

• Must I buy a computer system, and will the franchisor haveaccess to my computer data? (Item 11)

• Will I receive a protected territory? (Item 12)

• Is the company's trademark on solid legal footing? (Item13)

• Must I personally manage the business, or can I hire a manager?(Item 15)

• Can the franchisor terminate the contract under anycircumstances? (Item 17)

• What are the names and addresses of the current franchiseowners and those who have left the system in the past year? (Item20)

• Can I see a copy of the franchisor's audited financialstatements for the past three years? (Item 21)

• Can I see samples of the contracts I will be asked to sign?(Item 22)

Franchise laws require that a UFOC be delivered to you, theprospective franchisee, at the earlier of either the first personalmeeting to discuss the specifics of the franchise (a trade showpresentation generally doesn't count), or 10 business daysbefore you pay money or sign a binding contract.

Biz Opps & Network Marketing

Business opportunities are less structured than franchises, sothe definition of what constitutes a business opportunity isn'teasy to pin down. In essence, a business opportunity is any packageof goods or services that enables the purchaser to begin a businessand in which the seller represents that it will provide a marketingplan or sales plan, that a market exists for the product orservice, and that the venture will be profitable.

This definition encompasses a dizzying variety of businesspackages, such as product distribution programs, product andservice reselling, work-at-home programs based on computerizedservices, selling advertising for publications on the Internet, andspecialty product sales. A business opportunity does not generallyfeature the seller's trademark; the buyer operates under his orher own name.

Business opportunities tend to be less expensive thanfranchises, and they allow the buyer to proceed with norestrictions as to geographic market and operations. The purchaseprice of a business opportunity venture usually ranges from a fewhundred dollars to several thousand. Business opportunitiesgenerally don't charge ongoing royalties.

Most business opportunity ventures have no continuing supportiverelationship between the seller and the buyer; after the initialpackage is sold, the buyer is on his or her own. Many independentoperators don't want the pressure of operational requirementsin their business activities and are satisfied with contacting theseller only when specific questions arise. In addition, investorsmay want to operate a homebased business on a part-time basis. In aword, the primary advantage of buying a business opportunity isflexibility.

But the very flexibility that makes a business opportunityattractive is also its principal weakness as an investment. Manybuyers will spend the money, put the package on a shelf and nevertake it down to put it into operation. With no continuingrelationship, contract requirements or support from the seller,many buyers feel overwhelmed by the challenges of business andnever even get started.

Another weakness in the concept is the limited availability ofinvestment information. Business opportunity ventures are regulatedby the Federal Trade Commission (FTC) and 25 states. Under the FTCRule and most state laws, a business opportunity seller is requiredto prepare and deliver to the buyer a detailed disclosure statementbefore the sale takes place. Many of the state laws also requirethe seller to register the program before it's offered in thestate.

However, the rate of compliance with these laws is relativelylow. Odds are, you won't receive a disclosure statement withyour investment. This means you must do all the investigating tofind out whether a particular business opportunity is right foryou.

On the Level

Multilevel marketing is big business in the United States.Household names like Amway, Mary Kay Cosmetics and Avon have builtimmense organizations of independent contractors who buy productsfrom the company and sell them directly to their customers. Thistype of business entails a willingness to approach friends, familyand acquaintances who might be interested in buying the soap,cosmetics, telephone service or other product or service yourepresent.

Many people who get involved with a multilevel marketing programwork the business on a part-time basis or only for a season tobring in extra money. The financial investment is low, usually notmore than $200, and there are usually no required purchases. Youtake orders for products from your customers and submit the ordersand payments to the company; products are sent directly to you oryour customers. You make money on the difference between the retailprices paid by your customer and the cost of the products from thecompany. Multilevel marketing companies may also pay you acommission on the sales made by those you recruit to the network,called your "downline."

There is probably no business package available to the newentrepreneur that is easier to get into and out of than amultilevel marketing program. For a few hundred dollars, youreceive access to a line of products or services with a recognizedtrademark. Sales support is often made available through managersin your "upline"; they have a direct interest in seeingyou succeed.

Regional meetings can be energizing. Mary Kay Cosmetics andothers are famous for the levels of enthusiasm, motivation andempowerment that representatives feel at large gatherings of thenetwork. As you work your way up the sales ladder, generous bonusesand prizes may also be offered.

Like every other type of business, multilevel marketing has itsweaknesses. For one, the business depends largely on sales made tofriends, family and acquaintances. Not everyone is comfortablemaking sales presentations to people close to them. Also, theturnover among direct sales representatives is high, possiblyreflecting the short-term goals of most people who get involved. Itcould also reflect disappointment with the quality of the productor service. If a multilevel marketing program is new, therisks--and the allure of potential rewards--increase. As with anybusiness, thorough research is your best defense against gettinginvolved in an undesirable program.

What It's Really Like

When Vanessa Barron's employer asked her to relocate twoyears ago, the airline sales executive decided to start her ownbusiness instead.

Barron's choice of business was partially the result of achance occurrence: When her husband, Lawrence, had to visitBikeLine's headquarters regarding a damage claim related to hisUPS account executive job, he liked what he learned about the WestChester, Pennsylvania, bike sales and repair company'sfranchise opportunities. The couple opened a BikeLine franchise inCoatesville, Pennsylvania, in March 1996.

Vanessa, 42, found the franchise appealing because it came witha built-in support system--from the franchisor as well as from itscompany-owned locations. "You have a wealth of knowledge inthe people who have been running the corporate stores," shesays.

Would she recommend franchising? Absolutely. "A lot of themistakes you're bound to make starting a business can be[avoided] with the guidance you get from corporate locations oryour franchisor," says Vanessa.

She advises prospective franchisees to do their homework beforesigning up, however: Look at the franchisor's financial trackrecord, and investigate the amount and type of support it providesfranchisees.--Rachel Balko

If the Shirt Fits

Linda and Don Rienzo say they couldn't have asked for a moresupportive parent company. When the Las Vegas couple opened theirDefinitions T-shirt kiosk in a mall in 1995, the businessopportunity company helped every step of the way. "Whatever weneeded in the beginning, they were there to help guide us until wefelt comfortable dealing with it on our own," says Don.

The Rienzos had been selling another product in the same mallwhen a Definitions kiosk caught their eye. It looked like a goodproduct--T-shirts with attitude--and when the owner decided to sellthe business, they scooped it up. "We thought it had a lot ofpotential for the tourist malls in town," says Don. "Sowe approached the parent company and wound up becoming its dealerout here."

The Rienzos opened their second kiosk, which they called"Nationalities," in a large outdoor mall called theFreemont Street Experience, where crowds of spend-happy touristshave contributed to their success.

And they attribute much of this success to their parentcompany's support. Definitions extended credit to the Rienzos,walked them through the early stages of the business, providedmanuals and gave pointers to help get them started. "Now theyhelp us come up with new [products] to keep things fresh,"says Don. "It has really worked out well. We like what wesell, and we're proud of it. I think customers can sense that,and it really makes things work for us."--JesseHertstein

Toy Story

Product possibilities are infinite in multilevel marketing, buthow often can distributors say what they're selling promotes abrighter future? Junith Koon, a Discovery Toys Inc. educationalconsultant, makes this claim with conviction. The 20-year-oldLivermore, California, company has given Koon the opportunity tobetter the lives of her children and others with its award-winningproducts.

This toy story began when Koon's now college-age daughterswere toddlers. She signed up with another company that soldeducational toys and books, but nine months later, that divisionfolded. Her growing customer base wasn't stranded, however:Koon had heard about Discovery Toys and sought out Discovery'seducational consultant in her hometown of Atlanta. "It was aflexible, part-time business I could run from my home that, insteadof taking time away from my children, really benefited them,"she says.

What started as a brief selling stint until her daughtersreached school age turned into a full-time success story for Koon,now 50. After 16 years selling Discovery's developmentalchildren's products, the former librarian has earned the titleof "ruby sales director"--only one step away from"diamond sales director," the apex of Discovery'sselling stardom. Koon's downline--approximately 1,200people--should make more than $2 million this year.

And reaching new heights shouldn't take long: Climbing theladder of success is much easier when you know you're making adifference. "I've become a better parent as a result ofworking with Discovery because it taught me so much about childrenand child development," says Koon.

Koon can see how fortunate she's been. "I was able togo to [my children's] swim meets and honors assemblies,"she says, "while having a very successful business thatbrought me income and a sense of personal accomplishment." Whosays you can't gain success through fun and games?--MichellePrather

Andrew A. Caffey is a practicing franchise attorney in theWashington, DC, area; a former general counsel of the InternationalFranchise Association; and an internationally recognized specialistin franchise and business opportunity law. E-mail him at ACaffey@compuserve.com