The Difference Between a Business Franchise and a Business Opportunity
Posted on October 22, 2010 by My Franchise Law
Across the U.S. and worldwide there are hundreds of options for entrepreneurs to choose from when looking into starting their own business. For those who would prefer a framework instead of starting from scratch, business franchises and business opportunities are two solutions to the challenges of solo openings. But what is the difference between business franchises and business opportunities? Here are a few key differences to help you choose between the two:
Franchise: A franchise consists of a contract between two parties, the franchisor and the franchisee, that allows the franchisee to market products or services under the trademark and established methods of the original party (franchisor).
There are two main types of franchising, business format and product/trade name franchising. In business format franchising the franchisee inherits the entire structure for how they will run their business along with use of trademarks and logos and assistance with getting their business off the ground and keeping it on track in exchange for an upfront payment and ongoing royalties. Examples of this would be fast food chains and name brand coffee shops.
Product/trade name franchising does not involve royalty fees and the business structure is much simpler. Franchisees sell goods at their retail location, while using the franchisor’s trademark and logo. Examples of this type of franchising would be soft drinks, motor oils, and skincare products.
Business opportunity: A business opportunity is not nearly as structured as a franchise system, and generally consists of a buyer licensing a pre-packaged kit of goods and services that will allow them to start their own business with a predetermined promotional plan, and the expectation of an existing market. They would then sell the products or services in exchange for a commission; examples of this type of business include home-based businesses selling niche items like healthcare products, toiletries, and supplements.
Branding and operations: When working within the franchise format, you will be expected to adhere to certain standardized systems under the umbrella of a common brand. This consistency in production and operation ensures that customers at various locations can anticipate the same products and services, and all franchisees will be expected to maintain a certain level of quality and service or risk losing their right to franchise. Business opportunities, on the other hand, do not require business owners to operate under a restrictive format, and are instead more focused on getting the business off the ground. Some business opportunities include the option of using a common brand name, but in most cases this is not a requirement, and once you get started you may receive suggestions on how to most effectively run your business, but these will not be directives you have to follow.
Finances: Typically, franchisees will be expected to pay both an upfront fee and then royalty fees to the franchisor in exchange for ongoing support and the right to continued use of the brand and its systems. These royalties can be invested back into the business, used for marketing, paying employees who support various franchisees, and growing the brand. These royalties are paid on a fixed contractual basis, and may be either a pre-set payment or a percentage of sales. In contrast, with a business opportunity there is no requirement for ongoing royalties, and the business holder can instead keep their earning and invest them as they see fit.
Support: When working with a franchisor, franchisees can expect a continued level of support throughout the life of their business in order to ensure it runs properly and functions at its highest level. There are often scheduled meetings in order to receive new information, training, and marketing information, and a level of availability so the franchisor can address any questions or concerns. Business opportunities may also offer a level of ongoing assistance, but it is not contractually obligated and may be much more informal than with a franchise. Typically with a business opportunity, buyers can consult with their partners when questions or concerns arise, instead of meeting at regular intervals.
The legal issues: When purchasing a franchise business, franchisors are legally required to provide buyers with a Franchise Disclosure Document (FDD) detailing the history of the operation, any lawsuits, litigations, or bankruptcy, as well as all fees, operational costs, rules and requirements. They must also provide audited financial statements so buyers have a complete picture of what they are getting into. A business opportunity does not require a FDD, although it may have to adhere to state disclosure requirements, and so it will be up to you to do the homework to ensure you are getting a good deal for your involvement.
Bottom line: By choosing a franchise you will have more restrictive guidelines in place, but also have a clear picture of what you are getting into before you buy, along with a contractually obligated level of ongoing support. With a business opportunity you have the freedom to make your business into whatever you desire and are free from ongoing fees, but you will have to make do with less support and less initial information on the operations before you invest.