Franchise

In simple terms, 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:

* A franchisor generally collects an “up front” fee from the buyer but also collects on-going royalties in exchange for a proven business model. In a business opportunity, the buyer pays for the system or training, but does not have a further obligation, unless his contract specifies he buy inventory from the seller.

* A franchisor, in order to protect the brand and ensure consistency of the product, requires strict adherence to specific guidelines. In a business opportunity, the buyer may learn a specific program but is not required to follow the system.

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:

1. Franchisor allows the buyer to use the franchisor’s trademarks
2. Franchisor collects a fee (at least $500) from the buyer within the first six months of operation
3. Franchisor exercises “significant control” over the buyer’s operation on an ongoing basis

If a business meets the above criteria, it is considered a franchise by the FTC and is required by law to follow federal guidelines. The most critical FTC guideline requires franchisors to provide buyers proper disclosure information prior to finalizing the sale.

Before a potential buyer can purchase a franchise, he must receive specific disclosure information about the franchisor, called a Uniform Franchise Offering Circular (UFOC). The UFOC is a valuable document that 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 locations in that state.

In a franchise opportunity, the franchisor has a vested interest in the success of the buyer (franchisee) because it receives ongoing royalty payments. Therefore, the franchisor is usually committed to building the brand by adding locations, monitoring individual performance based on a proven system and assisting the franchisees to increase their revenues. This relationship lasts the duration of the franchise agreement.


Business Opportunity

In a business opportunity, 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.

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 a thorough investigation of the business.

Since there is no ongoing royalty payment, there is no vested interest by the seller to ensure that the buyer succeeds in the business. Although many business opportunities provide system training, they may not require or monitor performance. Sellers generally don’t invest in local marketing or operational support, but buyers are given complete freedom to run the business.

Income expectations for a business opportunity may be lower than for a franchise opportunity, but they are also a lower 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.

Which opportunity is best for the buyer?
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 buyer 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.

A Franchise Opportunity Provides:

A Business Opportunity Provides:
• UFOC disclosure information
• Brand recognition
• Marketing expertise
• Intensive training program
• Site selection management
• On-going support
• Security of proven processes

• No ongoing royalties
• Usually lower investment
• Company supplied advertising
• Intensive training program
• Site selection assistance
• Freedom to make choices
• Proven system of operation

Labels: Franchise Opportunity