Business Opportunity Knocks

Business Opportunity!! The words practically leap from the pages--whether in well-known national business publications such as the Wall Street Journal or Entrepreneur magazine, or in the classifieds flooding the back of the smallest daily and weekly newspapers in every city and town in the world. But what exactly is a business opportunity?

Let's start with what a business opportunity is NOT. In the strictest sense, a business opportunity is not a franchise (though a franchise clearly is a business opportunity!). Nor is it a chance to buy an independent business and call it your own (although this also is a business opportunity).

Confused? Good. Keep reading, all will be revealed. Perhaps the Federal Trade Commission (FTC) can help clear things up, at least from a legal perspective. Yes, yes, we know: "We're from the government and we're here to help you." Nevertheless...

In 1979, in an effort to protect potential buyers of business opportunities from being fleeced by unscrupulous companies or individuals, the FTC published the FTC Franchise Rule. In its easy-to-read guide (really!) to the rule, the FTC differentiates between two types of continuing commercial relationships: 1) traditional franchises and 2) business opportunities.

[Note: An independent business is distinguished from both "traditional franchises and business opportunities" in this very significant way: once the sale is completed, the seller and buyer have no further obligation to each other (unless otherwise agreed to by both parties and/or specified in the sales agreement).]

In a business opportunity, a continuing relationship is part of the total package--and a big part of the attraction (as it is with a franchise buy/deal). This ongoing relationship, and all it brings, is one of the major reasons for entering into this type of business relationship (or not).

The FTC Rule differentiates between these two types of "continuing commercial relationships," listing three "definitional prerequisites" for each. For traditional franchises, they are 1) use of trademark, 2) significant control or assistance, and 3) required payment. For business opportunities they are 1) no trademark, 2) location assistance, and 3) required payment. (The required payment definition is the same for both.)

In general terms, these rules play out as follows:

* Franchisees pay more, both up front (the franchise fee) and in ongoing payments (royalties off the top line of revenue, usually in the 6 percent range). But they receive more support (initial and ongoing training, POS systems, etc.), as well as national and local marketing.

* Business opportunities often have fewer barriers to entry, especially in price. And while they may receive less support, they also are freer to follow their own star, as they don't need to follow strict operational rules and other system guidelines to the letter, as a franchisee must.

For more information on the FTC Rule (revised, by the way, in late January 2007), go to www.ftc.gov/bcp/franchise/netrule.htm.

What floats your boat?
For someone looking for a part-time or home-based business, a franchise may demand too much time, especially for someone looking to keep their day job. A business opportunity such as a delivery service, a night job cleaning office buildings, aquariums or plant maintenance, or doing home-based computer work such as taxes, accounting, or other business services may be just the ticket.

Other possibilities for home-based business opportunities include tutoring, child care, business or marketing consultant, or phone sales. Kiosks represent another business opportunity, selling anything from food and snacks to seasonal items such as calendars, sports apparel, and gift items based on the never-ending parade of holidays and other gift-giving occasions; or at sports events themselves. The cost of entry is lower, while the reduced time required allows an easier transition and allows new entrepreneurs to hedge their bet. If the new venture doesn't work out, there's less to lose.

Another variation on the business opportunity involves licensing a product and/or name. Often these arrangements involve purchases of equipment and/or inventory that must come directly from the entity granting the license.

Chester's International is an interesting case. The company has moved through several incarnations. Founded in 1952 as a family-owned doughnut business, it incorporated as Giles Enterprises in 1965 as a cooking equipment manufacturer, and in 1974 began manufacturing and licensing chicken fryers for its own fledgling brand, Chester Fried. On the wings of this model, the company rode its mascot Chester the Chicken to 2004 sales of $700 million from more than 1,700 licensees.

This success was based on a manufacturing and distribution model: selling its restaurant equipment, food, and supplies to licensees who operated out of convenience stores and travel plazas. But in June 2004, the company shifted its focus from licensing to franchising. Renamed Chester's International, the company still supplies and supports its licensees, but today sells only franchises. (See Franchise Update, Issue II, 2006)

For more information on the pros and cons of the various types of business opportunities, Entrepreneur.com's online "Small Business Encyclopedia" offers a good introduction for anyone considering spending their hard-earned money to make more
(www.entrepreneur.com/encyclopedia/term/82298.html).

Another good source is the NFIB, the National Federation of Independent Business, which offers a "Tools & Tips" page on its web site (www.nfib.com/page/toolsHome).

Buyer beware
As the old saying goes, "There's a sucker born every minute." Don't be one. If it sounds too good to be true, it probably is. To aid buyers in performing their due diligence--a do-or-die responsibility before mortgaging your future with any business opportunity--the FTC provides extensive questions to ask, as well as practical tips on who and where to call, to find out more about any business opportunity you may be considering, phone numbers included. For help in protecting your investment (and avoiding bad ones), go to www.ftc.gov/bcp/menu-fran.htm#bized.

If you like people, consider retail; if you want to be left alone after a hectic day at work, home-based is your meal ticket. If you already have your own business, consider something counter-cyclical or complementary, so that if one fizzles the other sizzles.

Finally, consider the time-tested advice to follow your passion when looking to hitch your financial wagon to someone else's star. It's a big universe out there, with a virtually infinite number of stars to shoot for, so choose one you like.

Published: February 20th, 2007

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