Buying a Franchise vs a Business Opportunity?

How to tell the difference between a franchise and business opportunity and determine which is the better fit for you.

Buying a Franchise vs a Business Opportunity?

Opportunities are everywhere. You can start your own business from scratch or choose from hundreds of franchises and business opportunities, in just about any field you want. In fact, there are so many different opportunities and alternatives available that it’s sometimes difficult to figure out which is the best path to follow.

Once you decide you’d like assistance in starting, you still need to understand the differences between franchises and business opportunities and how to choose which is right for you.

Franchises and business opportunities are fairly similar, but they do have a few distinct differences, in four key areas:

1. Common Brand and Operating System

One of the tenets of a successful franchise system is that all units operate under a common brand and operating system. This is how a consumer knows a Big Mac will be the same in California or Cape Town. A franchise system makes a concerted effort to ensure that every operator is doing the same things and every unit is supporting and reinforcing the brand.

In a business opportunity, there’s typically no requirement to operate under a common brand, though some business opportunities may let you use their brand. Since the focus of a business opportunity is on setting you up for operation, very little consideration may be given to imposing a common operating system after the business opens. You normally get extensive suggestions about the most effective way to run your business after opening, but they are not rules.

2. Ongoing Support

A franchise typically has an ongoing commitment to support you over your entire tenure in the business. These support programmes usually involve structured periodic contacts with dedicated support personnel for marketing, staff training, technology and other aspects of ongoing operations.

Though a business opportunity may also offer you ongoing support, the process is usually very informal and not based on any contractual commitment. Usually it is demand-driven, as the business opportunity owner responds to requests for assistance. They typically don’t have dedicated staff for ongoing support needs.

3. Ongoing Fees

As a franchisee, you typically have a contractual commitment to pay the franchisor ongoing fees in exchange for the continuing right to use the brand and operating system. These royalties also help the franchisor pay for the dedicated staff and programmes they use to provide ongoing support to you. Royalties can be a fixed periodic amount or may be expressed as a percentage of your sales.

A business opportunity usually doesn’t have any such ongoing payment commitment and this is a key factor that differentiates franchise and business opportunities.

4. Legal Disclosures

The final key difference between these two types of opportunities is related to the legal restrictions associated with the sale of the business to you. These typically involve complying with both federal and state laws and regulations in terms of required disclosures made to you during your investigation phase.

In a franchise, these requirements should be very stringent and will be centred around a document called the Disclosure Document. This document contains a wealth of information about the company and the opportunity being offered, including the history of the operation and key employees, any litigation or bankruptcies, all fees and costs, all rules and restrictions related to the business operation and it’s audited financial statements.

A business opportunity may not adhere to the same structure and will not necessarily deliver any such document. This doesn’t mean one is better than the other – it just means you’re probably going to have to do more of the work yourself to make sure you have the information you need from a business opportunity.

You can safely assume that your initial and ongoing franchise fees will be greater than for a business opportunity. If you choose a good franchise, the trade-off is that your risk of failure should be lower and the profit you make in the long term should be higher. If you don’t believe that, there’s no reason to pay the higher fees associated with a franchise.

A business opportunity allows you to change the business into whatever you want it to become – rather than being restricted to a common brand and operating system. If you are a true entrepreneurial type, you might find that a business opportunity is more attractive to you because of the flexibility.

There is no right answer in terms of which strategy is better – it depends on the business model and your philosophy about what you want to accomplish. A careful and thoughtful analysis of your personal goals for establishing a business should help steer you in the direction of the type of opportunity that is best for you.

Jeff Elgin
About the Author
Jeff Elgin has developed a consulting system that matches pre-screened, high-quality prospective franchisees with the franchise opportunities that best fit their personal profile.

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