Franchises vs. Business Opportunities
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Business opportunities and franchises are two ways to start a business without having to start from scratch, providing prospective business owners a pre-established system to operate with.
While they are similar, and have many overlapping features, they have distinct differences that should be acknowledged before any entrepreneur signs on the dotted line to proceed with either.
A business opportunity is defined as the sale or lease of any package, including a product, service outline, equipment, etc., that will enable the purchaser to begin a business.
Business opportunities cover a broad spectrum of careers, and include the following:
- Turnkey Operations: A business model where a product or service is ready to be sold or provided immediately after the purchase without additional input by the purchaser.
- Distributorships: An independent agent has the right to sell and market another company’s products to dealers, but cannot use that company’s name as part of their own.
- Dealers: Similar to distributorships, except the sales are to consumers and retailers.
- Network/Multi-Level Marketing: An agent sells products directly to consumers and recruits others into the program as well. Usually, a commission is paid to the agent on their own sales and the sales of the agents they have recruited into the program.
- Trademark/Product Licenses: A company grants a licensee the right to use the seller’s trade name along with their methods, products, equipment and/or technology.
- Rack Jobbers: A company sells their products through store racks that an agent services. The company maintains the racks, and the agent is in control of the inventory and how to display the merchandise. Periodically, the agent will notify the company of what was sold, and the company will send a commission check.
- Vending Machine Routes: Similar to rack jobbers, except the agent (vendor, in this case) must pay for the machine and the product. The agent also has to service the machines him- or herself.
- Assorted Other Opportunities: A company contracts an agent to do work remotely, most often by computer. Examples include taking surveys from home, selling merchandise on eBay, data entry work, affiliate marketing, and many more.
With the purchase of a business opportunity, typically the buyer owns the business outright and can customize all aspects of the business to their tastes. When a potential business owner contacts a person (or entity) selling a business opportunity, they are contracting with that licenser for a business system including training, equipment or a service method that the licenser has been through the growing pains with and has made profitable. Traditionally, once the purchase is finalized, and training (if applicable) is completed, the relationship is over.
A franchise is defined as the right or license granted by a company (franchisor) to an individual or group (franchisee) to market its products or services in a specific territory.
Three common types of franchises are:
- Business Format: Probably the most popular form of franchising. The franchisor licenses their brand to a franchisee for use with a predetermined way of conducting business.
- Product: The franchisor grants the franchisee permission to sell/distribute a product using their logo, trademark and trade name.
- Manufacturing: The franchisor permits the franchisee to manufacture their products (i.e. food) and sell them using their trademark and name.
When the purchase of a franchise is made, the purchaser is required to comply with clearly defined guidelines and rules regarding the operation of the business unlike in a business opportunity. These guidelines are in place to protect others within the system and maintain brand consistency.
And unlike most business opportunities, costs paid to the franchisor commonly don’t end with the initial sale. Royalty payments are commonly collected for as long as the franchisee owns their franchise. In exchange for these payments, the franchisee will receive continued support, such as access to updated industry knowledge and best practices.
Also, in acquiring a franchise, the potential franchisee goes through what is traditionally a much more extensive vetting process to complete the deal. Prospective franchisees go through an interview process that includes completing an application that details his or her background and work experience. In person meetings are also held to assess how the prospective franchisee would fit into the franchise’s system. The prospective franchisee will also provide detailed financial information to the franchisor, so the franchisor can gauge financial viability .
The franchisor also makes several disclosures upfront. Franchisors are required in 6 provinces to present potential franchisees with a Franchise Disclosure Document (FDD) at least 14 days before a contract is signed. A FDD is a document that outlines the history of the business, all the franchisees in a franchise’s system, turnover rates, terminations, fees, rules, restrictions, and numerous other items pertaining to that particular franchise.
Then, assuming the potential franchisee is deemed a suitable candidate, the franchisor will present a franchise contract that the prospective franchisee should be go over with legal counsel before it is agreed to.
The following chart lays out the main differences between the two entities.
|Costs||Typically less expensive than a franchise, with few requiring royalty payments.||Higher upfront costs with required royalty payments to the franchisor. It is not uncommon for potential franchisees to acquire financing assistance.|
|Structure||Less structured operations allowing for owners to implement the systems that work best for them along with easier customization of the business.||Very structured with few deviations allowed from the established business model. This is to ensure brand continuity and quality standards.|
|Ongoing Support||Usually there is little contact between the seller and purchaser of the business opportunity after the business is set up. Any support is usually informal and not based upon a contract.||Franchisors typically provide training, marketing support and other items to franchisees as a part of their agreement.|
|Legal Regulation||Still bound by all business laws, but no special disclosures.||In Alberta, British Columbia, Ontario, Manitoba, New Brunswick, and Prince Edward Island, franchisors must provide a FDD to the franchisee at least 14 days before any agreement is signed/finalized.|
Risks of Both
Because business opportunities aren’t as closely regulated as franchises, the entrepreneur must personally take precautions to avoid scams. Howvever, just because franchises currently have more federal regulation than other business opportunities doesn’t mean that they are without risk. There are several risks to owing a franchise as well.
For instance, in the event of a dispute, current laws provide little support or protection to a franchisee. There can also be expenses for equipment or materials needed to run the business that aren’t specified in the FDD that mount up in addition to the denoted franchise fees.
Picking the Right Opportunity for You
To sum it up, all franchises are business opportunities, but not all business opportunities are franchises.
Figuring out what kind of entrepreneur you are and what you’re looking for is important for deciding which kind of business you should pursue.
Both are good for potential business owners that don’t have a unique product or service to bring to the marketplace, but still want to run a business day-to-day. The big difference maker is how much support you want. If you’re simply looking for a jump start and desire more flexibility, a business opportunity is probably the route for you. If you’re looking for consistent support, and can handle a measure of restriction in the procedures of your business, maybe a franchise is the path for you.
Regardless of whichever one you decide to pursue, here are some tips to help you along the way:
- Research background information on the business.
- Find and contact current and former owners who have been through the process with the business you are seeking to start. Ask them questions.
- Recruit experts such as a lawyer, accountant, realtor (for zoning considerations) to help ease the burden and help you make sure you are acting in your best interests.
- Read through all documents thoroughly before signing anything.
No business venture is immune to failure without a sound business plan and a lot of hard work. For these reasons, do extensive research, ask a lot of questions, particularly when it comes to net earnings, temper your expectations, and work hard at making your business a success.