| There are two effective ways to become a
business owner without reinventing the wheel and starting your own business from scratch:
buying a business opportunity and being awarded a franchise business. Each has advantages
and disadvantages so knowing how each works and how you would fit their model is important
before you begin your search for a particular business.
Business Opportunity
With a business opportunity, you buy and own a business
outright and operate it under a name you choose. The seller makes his money by delivering
the business system, training, equipment, or service method to the buyer. In some cases,
the seller may also make residual income for the ongoing sale of products or services, but
for the most part, the relationship is over once the purchase is final.
Government Protection
While a business opportunity is not federally regulated,
some states will encourage a general form of disclosure prior to purchase, but most do not
require it. If a business opportunity does offer a disclosure document, it may provide
only general information. The lack of regulation can speed up the purchase process, but it
also leaves the buyer responsible for completing a thorough investigation of the business.
Some advantages to a business opportunity are that there are no ongoing royalty payments
and the buyer is given complete freedom to run the business as he chooses. On the
downside, there is no vested interest by the seller to ensure that the buyer succeeds in
the business so they are less likely to offer ongoing support, marketing help, etc. Income
expectations for a business opportunity may be lower than for a franchise opportunity, but
they typically are available at a lower overall investment than most franchises. A
business opportunity may not require costly leasehold improvements or large working
capital reserves, making it an option for many people whom may not have the capital
available to purchase a franchise. For many buyers, a business opportunity provides the
flexibility to start out as a supplemental income or home-based business, but has the
potential to support their lifestyle and meet their financial goals in the future.
Franchise
A franchise opportunity is a relationship between a seller
and a buyer that continues for the duration of the buyer's involvement in the business. A
franchise differs from a business opportunity in two important ways.
First, a franchisor generally collects a franchisee fee up
front from the buyer and also collects on-going royalties. What the buyer gets for these
fees are access to a brand, a proven business model, comprehensive training and ongoing
support.
The second difference is that in a franchise, the
franchisor will require the franchisee to adhere to strict guidelines in the operation of
the business. This is done because it is the franchisor's name on the business. The brand
must be protected for the benefit of all franchisees in the system and the service or
product provided must be consistent from store to store and state to state.
Government Protection
The Federal Trade Commission (FTC) regulates franchising at
the federal level. In order for a business to be labeled a franchise, three elements must
be in place:
- Franchisor allows the buyer to use the franchisor's
trademarks.
- Franchisor collects a fee (of at least $500) from the buyer
within the first six months of operation.
- Franchisor exercises "significant control" over
the buyer's operation on an ongoing basis.
The most critical FTC guideline requires franchisors to
provide buyers proper disclosure information prior to finalizing the sale. This document
is called a Uniform Franchise Offering Circular (UFOC) and will assist a buyer in
completing the due diligence (the process of investigation into the details of a potential
investment and the verification of material facts) before purchasing the franchise. In
many cases, individual states have additional guidelines a franchisor must meet to sell
franchises in that state. The UFOC is of enormous value to a prospective franchisee and is
the best way to differentiate the good franchisors from the bad. Franchisors must disclose
any litigation they have faced, list all franchisees in the system and address turnover,
terminations, etc. Although not required, the UFOC can also list the earnings potential
for a franchise.
Which is Best?
The answer, obviously, is that it depends on the buyer. An
entrepreneurial individual may find the confines of a franchise opportunity limiting and
thrive in a business opportunity where he makes all the decisions. Another person may find
the brand recognition, ongoing assistance, and company-wide marketing programs associated
with a franchise just the safety net he needs to feel confident when starting a new
career. If you've never owned a business, you may find that franchising offers a
significant advantage to you over a business opportunity. A good franchisor is
continuously working on refining the product or service and building the brand. As the
marketplace or technology changes, your franchisor will be there for you, providing new
products, upgraded equipment and training as needed. As a franchisee, you have the benefit
of learning from your peer groups - other franchisees in your area, region, state and even
across the country. You may also have such advantages as group buying power and national
advertising. A franchisor has a vested interest in seeing each franchisee succeed for many
reasons, including the royalty it receives. The royalty revenue makes it possible for the
franchisor to have a strong corporate staff and to provide a superior level of ongoing
support to the franchisees. Finally, franchising offers one exceptional benefit over a
business opportunity and that's the power of the brand. A consistent, recognizable, and
everywhere brand is important to customers with an added benefit of increasing the value
of the investment the franchisees make in their business. |
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