What is a business opportunity? This question has plagued many people who have wondered whether to buy a business or a franchise, which we will call business opportunities in this article.
Now let’s explore the concept a bit: a business opportunity is a packaged investment that allows its buyer to start a company. Franchises operate in a similar way and are also business opportunities; however, it’s not necessary for every business opportunity to be a franchise. That’s because, with business opportunities, the seller has no control over the way the buyer operates the business, and with franchises, it tends to be the other way around.
If this wasn’t complicated enough, all 50 states have passed laws that aim to define business opportunities as a way to regulate their sales. These statutes are so comprehensive that they also manage to include franchises more often than not. However, not every definition in every state is the same, but most laws use this general criterion to define what a business opportunity is:
- It involves a sale or lease of any product or service while enabling the buyer to start a business.
- The seller declares that he/she will assist the new owner while also guaranteeing an income higher than or equal to the price the purchaser bought the company for.
- The initial fee that the seller needs to receive has to be in the range of $400 and $1000.
- Any products or services that the seller made need to be purchased by the buyer.
- The seller will supply the buyer with a sales or marketing strategy that will include the use of a trademark or trade name.
Usually, the sale of an independent business by its owner doesn’t fall into the category of business opportunity ventures, and so these laws don’t cover it. In fact, their existence is meant to protect the sales of distributorships or businesses that are like franchises but do not meet all of the requirements stated to fall under the Federal Trade Commission (FTC) rule passed in 1979. This act separates business offerings into three different formats: business opportunity ventures, product franchises, and package franchises.
You may wonder what requirements a business opportunity has to cover to fall under the FTC rule, and so here are the four elements that have to be present:
- The person who buys a business opportunity, often called the licensee or franchisee, has to sell or distribute goods or services supplied by the franchisor or licenser.
- The licensor or franchisor must find an outlet for the services and goods the licensee sells or distributes.
- The two parties must do a cash transaction between themselves of at least $500 before or within the first six months after the new business venture has begun.
- The terms and conditions of the business relationship between the two parties must be present in written form.
After reading all that, you’ve probably figured out that the sale of business opportunities is nothing like the sale of an independent company. When you’re buying an independent business, the seller will have no obligations towards the buyer. On the other hand, once the sale goes through, the buyer can do anything with the company according to his/her preferences.
However, when it comes to business opportunity ventures such as franchises, the seller makes a commitment to continue being involved with the buyer.
Different Types of Business Opportunities
According to the FTC rule, there are three types of business opportunities that are most commonly seen:
- Rack jobber: in this process, another company’s products are being sold through a distribution system of racks in dozens of stores that the jack robber services. Here, it’s typical for the buyer or agent to have an agreement with the parent company to promote his/her products in different stores by using store racks placed in key locations. In this scenario, the agent is tasked with maintaining the inventory and making sure to attract new customers. At the same time, the parent business only receives information on the number of locations where racks are placed.
- Distributorship: This is when an independent agent is contracted to offer and sell another business’s product. However, he/she is not entitled to use the manufacturer’s trade name. Depending on the kind of contractual agreement that was signed, the agent may be able to sell only one company’s products or have the freedom to distribute a few different product lines from other firms.
- Vending machine routes: This business opportunity is kind of like rack jobbing. Here, the businessperson has to invest more as he has to buy all the inventory and the machine. However, the payment procedure is totally different – in this scenario, the vending machine owner has to pay the location a percentage of all sales made. The best way to make money here is to get your machines in high-traffic areas.
Additionally, along with the three business opportunities mentioned above, there are another four categories that you should know:
- Cooperatives: This is sort of like a licensee agreement. Here, an existing business can become affiliated with a more extensive network of similar companies to get better advertising by sharing a common identity.
- Network marketing: This term refers to something like multi-level marketing. If you work as a network marketing agent, you will try to place your products in your network of colleagues, friends, and neighbors. If you manage to develop this strategy, you can start gaining commissions from hiring other agents.
- Dealer: Here, the work is similar to the one of a distributor. The only difference is that the distributor sells to a number of dealers, while a dealer only sells to customers or retail stores.
- Trademark/product licenses: Here, the licensee obtains the right to use the trade name of the seller, as well as any other equipment or technology.
What Does the Government Do to Protect You?
You already know about the FTC rule that has been in effect since 1979. It has significantly impacted franchises and business opportunities and franchisees and licensees. It was designed to ensure that all prospective buyers, of either a business opportunity or franchise, will receive full disclosure with all the information they need to make an informed decision about their investment.
That being said, despite the FTC rule, there are still sellers who seek ways to escape regulation. Unfortunately, neither the FTC nor state-level regulations can ensure that there will be no fraud. That’s why when signing any type of contract, you need to pay specific attention to the FTC disclosure statement that comes with it.
Suppose you’re a prospective buyer of a franchise or a business investment opportunity. In that case, you have to receive an FTC disclosure statement at least 10 business days before paying the money or signing the contract with the seller. That 10-business day requirement is the absolute minimum. However, if you have a face-to-face meeting with the seller or his/her representative, that’s a serious discussion about making the proposed sale. In that case, then the seller or representative has to provide you with the disclosure document at that same meeting.
If the seller doesn’t provide you with that disclosure document, they violate federal and possibly state law. If the seller claims that their proposal is exempt from the FTC rule, you have to demand the opinion of a lawyer before continuing negotiations. Remember, very few business opportunities fall outside the FTC rule, so if the salesperson claims that their offering falls outside the rule, you have to demand proof from the local state agency or FTC office that has given that statement.
The Difference Between Franchises and Business Opportunities
Business opportunities typically don’t get any support from the parent company. They can’t use the trademark name, and the business owners are entirely free to operate the business as they wish. On the other hand, franchisees receive support from the parent company and are allowed to use the trademark name under strict supervision.
As previously mentioned in this article, there are a ton of different business opportunities. Some are similar to franchises in the fact that they give you everything needed to run a company: training on how to run it, a location where you can start, and all the required inventory. However, those still can’t use the trademark name, and the only thing that binds the seller and the buyer are the contractual agreements and the disclosure statement.
Pros of Business Opportunities
Proven Product or System of Operation
Business opportunities ensure that you will have the processes ready so that you know what to do when a crisis arises. Along with that, having an already established system will help maximize returns and minimize any issues.
Great Training Programs
If you are in a stable business opportunity venture, you will have a way to skip over the costs and time that are usually dedicated to training. If you have a good partner, that person will make things quicker by offering you an extensive learning program.
Lower Initial Fee Than a Franchise
Nowadays, there are more and more low-investment franchises; however, the fee to get a business opportunity is much lower. As per the FTC rule, there’s a minimum of a $500 investment that is required for a chance to be considered a business opportunity and there is a lot that falls under that fee.
Easier to Finance
A parent company can arrange better financing for the business opportunity than you ever could alone. It’s all because, as a business, it has a substantial financial side already established and a credit line.
Better Marketing and Advertising
If you’re a small business owner or a young entrepreneur, you will likely not have a large marketing budget. Your marketing efforts will always be inconsistent or won’t have a significant effect on sales. However, with most business opportunity ventures, you will receive a ton of advertising materials: radio ads, TV storyboards, and printed slicks that will help with your marketing strategy. Along with that, some ventures will also support you by splitting advertising costs.
Help with Location Choice
If you have a powerful company standing behind you, you will likely have experts help you choose a location using the best possible methods. Also, you will have professional negotiators help you with arranging leases and contracts and the power of a large firm can definitely help lower costs.
No Ongoing Royalties
Unlike with franchises, if you’re in a business opportunity you won’t have to pay any royalties to the seller. Instead, everything you earn is left to you.
Cons of Business Opportunities
If you fall under the perfect conditions, business opportunities are a great way to start a business without taking a lot of risks and with a good chance of finding success. However, as you know, there are no perfect situations in this world, and here are some of the difficulties you might face:
No Ongoing Support
There’s no requirement for the seller to be cooperative and support you after the sale goes through. That means that if you’re left with not enough information or guidelines, you will have to find a way to run things smoothly on your own.
There are certain businesses that will demand that you sell only their products, and if you deviate for some reason, there’s a chance that the licensor will cancel your agreement. Along with that, even if you use other sources to get products from different brands, you won’t be able to hide it since most parent companies will want to be able to review your books every few months. If you genuinely want to get ahead, you will make sure to negotiate a point in the agreement that will allow you to sell other products in case of issues with product quality.
Bankruptcy of the Parent Company
Another worst-case scenario is for the parent company to go bankrupt. Now, this would be terrible if you owned a franchise, but a business opportunity still suffers consequences from bankruptcy. There’s a chance that you could lose your company because the parent company financed your property contracts.
Poor Location Choice
If you want your business opportunity to be successful, choosing the right location is of crucial importance. Usually, people who are too eager to start agree with whatever locations get offered to them. But you shouldn’t do that. Instead, when you get the proposal, do your own research and evaluate if it’s a place that will allow you to succeed. If you find that the proposal from the parent company is not good, you should argue with them to get the best possible spot.
If you want to find the right business opportunity, you have to carefully look into any possible opportunity you’re considering. Create a list of parent company representatives and call them. Before signing any contract, have a lawyer look it over. Make sure that you get a disclosure statement and carefully evaluate the company you will be working with. Don’t let them hurry you or give you ultimatums.
Rules to Follow When Choosing a Business Opportunity
When considering business opportunity leads, you should first make sure that it complies with all legal requirements. Furthermore, when selecting a business opportunity, you have to consider the fact that you’ll pay more if you want to buy from an established business than if you choose to buy from a startup. However, regardless of what kind of a company you choose, you still have to evaluate its success and the people that stand behind it.
Along with everything mentioned above, there are a few other guidelines that you have to follow in order to find the perfect business opportunity. Here are some of them:
- Be honest about your abilities and yourself: Ask yourself what you can do well, but also what you enjoy doing. If you currently dislike your 9-5 job, it’s not a good idea to keep doing it, even if it’s for yourself. Instead, try to find something that you genuinely love doing every day.
- Have knowledge of the product or service you’re offering: You have to be able to know how to navigate the business opportunity, even if the parent company doesn’t provide you training or how-to knowledge.
- Evaluate how the product might perform on the market: Is there a potential for this item to be a success? How will the public react to it? These are questions you need to find the answers to.
- Ask other buyers what they think about the product: If you’re working with a legitimate parent company, they won’t hesitate to provide you with contact information of other buyers so that you can ask them more about the business and their personal experience.
- How much can you earn from the business: Is it possible for you to make the same investment and earn more money? Are the earnings worth the effort?
- Research the parent company: What kind of a business is it: a new one that’s just starting to establish itself, or has it been in the market for a long time? Are their customers satisfied? Do they have a good reputation online? These are things you have to know before starting to negotiate with any company.
- Verify that the company is financially stable: Before starting your business relationship, make sure that the parent company has financial resources to back up your venture. Discuss it with the high-level management and ask them for proof.
- Having an attorney and a business consultant is especially vital if you’re inexperienced. Having a reliable team of people around you will help you make better choices.
- Visit the parent company headquarters: It’s always a good idea to pay a visit to the HQ. That way, you will get the chance to meet the employees and ask them more about the business and the way it operates. Along with that, you will be able to see the products firsthand and evaluate them.
How to Evaluate a Potential Opportunity?
In the previous paragraph, we discussed how you could ensure that a potential business opportunity is really worth it. However, it’s vital that you check all the boxes before signing a contract with the seller. Here are some of the strategies you can use to protect yourself:
- Have an attorney: Your lawyer should be there when you’re negotiating with the licensor-seller. If you cannot afford that, then the minimum requirement is to have an attorney look over the contract and advise you on whether it’s a good idea to sign it or not. He/she should explain to you what the different points in the contract are so that you also know what you’re signing.
- Have an accountant: You should have someone to help you out with the financial aspect of the business. Make sure you hire a good accountant that can go over the parent company’s financial statements. That way, you will be able to evaluate if the investment is worth it from a financial standpoint.
- Do your own research on other business opportunities offered by the same company: Ask about their thoughts on working with the licensor-seller: are they happy? Did they get all they were promised? What do they feel are the partnership’s good and bad points? Would they advise you to invest in the opportunity?
- Ask the competition: By doing so, you will immediately see how important the company is to its industry if competitors jump at the chance to tell you all about what the company does wrong, which will only verify the status of the licensor-seller you want to do business with. Along with that, you will be able to see whether the business opportunity you’re considering is really worth it in comparison to other offerings available on the market.
- Check the credibility of the parent company: High revenue isn’t the only thing that makes a company credible. Don’t rely only on that to verify the credibility of the company you’re considering working with. Instead, ask the opinions of people who’ve already had a business relationship with the company. Every employee, client, or business partner will offer a valuable opinion that will help you evaluate what kind of a company you’re considering working with.
- Check the company’s management: Nowadays, it’s not enough to have a good idea. In order for a company to continue growing, it has to have stable management that’s able to help you while keeping the business running smoothly.
- Verify if the company’s performing well: All sellers will tell you that their company is performing great, but it’s your job to fact-check their claims. Do independent research that will help you determine how well the product is doing on the market.
- See what kind of a marketing program you can get from the parent company: Check if it’s going to work for you, depending on your local market. For example, if you’re getting into a business opportunity selling bathtub liners, will advertisement in a fashion magazine help? Also, consider what the ads look like: is the copywriting good? Are visuals appealing? If you deem that their generic ads aren’t good enough, you can negotiate not using them. Remember, just because you’re working with a company with more experience, it doesn’t necessarily matter that they’re always doing things in the best way possible.
- Are you getting the value that you were promised for the initial price: Before signing the contract, examine everything you’re getting, from equipment, fixtures, and inventory to operating suppliers. Then call a few people that already sell these types of products and compare prices with them. If the situation’s not good, it may turn out that you can purchase everything, including the inventory, for a lower price if you’re not working with a parent company.
As you may have already figured out, finding a business opportunity is the easy part of the process. However, finding one that fits your criteria and can be successful is extremely difficult. That’s why this article is dedicated to helping you in your search. Hopefully, it helped you get a grasp on the differences between business opportunities and franchises, as well as useful tips that you can look at when you’re already considering starting a new venture.
Remember, it’s often not that a proposal is flawed on paper. In fact, it may look great while it’s being presented to you. However, your number one job as a business owner is to check everything you’re being offered and to consider how you would run it and whether you want to. If you manage to find a business opportunity that you’re excited about and that has support from the parent company, then you’re good to go.