Is it a Franchise or a Business Opportunity?

Article by: Lynne D. Shelton

What is the difference between a franchise opportunity any business opportunity? A business opportunity simply gets you started in a business. Once you start your business, you are basically left on your own. In contrast, franchise opportunities imply a contractual relationship with the franchising company, a partnership that will exist as long as you’re in business, typically 10, 20 or more years. There are other fine differences between franchise opportunities and business opportunities, as we explain below.

Aspiring entrepreneurs have a world of opportunities at their disposal. Many choose to start their business from scratch while others choose to take advantage of business opportunities that have already shown themselves capable of turning a profit. Entrepreneurs who fall into the second category have a couple of options at their disposal: “Franchises” or “business opportunities.”

While franchises and business opportunities may look alike, in fact they are very different area knowing the difference between the two is crucial and can make the difference between successful business venture in entrepreneurial disaster.

What is a franchise?

A franchise is defined as a business that is authorized to sell or distribute a company’s goods or services in a particular geographic area. When you open a franchise, you own the business and infrastructure along with the right to use the franchising Company’s brands, trademarks, and promotional materials. In most cases you also own the exclusive right to sell the product in your franchise area; however, have no right or ability to sell other companies products or services within your franchise area.

In return for these rights, the Franchisee (you) agree to pay an upfront franchise fee to see franchising company. This fee usually covers a variety of services that are provided to you by the franchising company including initial training, grand opening training, operational manuals, procedure manuals, ongoing support, annual updates and conventions as well as access to the franchise distribution chain. There is often an ongoing franchise royalty fee is paid on a weekly, monthly, quarterly, or annual basis.

What is a business opportunity?

A business opportunity is not nearly as structure or clearly defined as a franchise. Generally speaking, a business opportunity in a prepackaged array of goods or services that allow the buyer to start a business the expectation of an existing market, a promotional plan, and profitability.

What are the advantages and disadvantages of a business opportunity?

An advantage of business opportunities is that they are less restrictive to operate than a franchise. They typically cost less to purchase and rarely require ongoing franchise or royalty fees. Also, business opportunities typically do not involve a protected territory therefore there are no restrictions as to the business owner’s selling area or strict operational standards within a given area.

On the downside, however, business opportunities don’t provide the buyer trademark rights, a protected territory or ongoing assistance. Essentially, after you buy into the business opportunity you are cut loose to succeed or fail on your own.

What are the advantages and disadvantages of a franchise?

Without a doubt, franchises are usually more costly and business opportunities in both the upfront fee and the ongoing royalties. However, in exchange the franchisee receives valuable services such as employee training, promotional benefits, trademark rights, ongoing support, additions of new products and services, annual conventions, best practices guidelines, etc. This can be a huge benefit, especially for entrepreneurs who are entering the world of small business for the very first time.

The geographic and operational restrictions placed on franchisees can also be viewed from a value added perpective. Although your franchise may be limited to a certain geographic area, you will be the exclusive seller of your goods and services within that area – a guarantee that business opportunities cannot offer. Likewise, the operational standards requried by many franchises provide the franchise owner with a proven and established system of quality control. With a franchise, the work has already been done for you.

Since a business opportunity is more expensive for the company to establish nationally because of individual state registrations, the buyer should view this as proof positive that the business seller has no intentions to give ongoing support and communications. On the other hand, a franchisor has taken the time and established a system specifically with a nod towards a long-term commitment with you.

The type of assistance and ongoing support you crave should be a good indicator as to which type of system would be best for you. Whether you choose a business opportunity or a franchise, Shelton Law & Associates can assist you in evaluating the legal documents and disclosure requirements required by the FTC.