What is the Difference Between a Franchise and a Business Opportunity?
A business opportunity is simply a comprehensive business investment that lets the buyer start a business immediately, out of the box, so to speak. A franchise is also a business opportunity, but not all business opportunities are franchises, says franchise expert Joel Libava at The Franchise King.
He explains the difference this way:
“Sometimes, people confuse a franchise with a business opportunity, or “bizopp.” The major differences include upfront costs (which are almost always significantly lower with a bizopp), support, and the rules. In a business opportunity, there aren’t that many rules to follow as an owner. Business opportunities are generally looser in nature; you buy the opportunity, learn how to run the business, and then you’re pretty much free to market it and run it as you wish.”
To expand on Libava’s explanation, we turn to another franchise expert, Mariel Miller, founder and CEO of The Franchise Advisor, a franchise consultancy.
To Miller, the main differences between going with a franchise vs business opportunities relates to the personality of the business owner and how quickly he or she wants to reach profitability.
“Let’s say I was going to open an independent business. If it’s all my own, everything from colors and branding to the computer network and financials, I get to make it all up. The upside of that is it represents my sense of creative expression and pride of ownership. The downside, however, is that the number one reason businesses fail in the United States is undercapitalization. If you have to figure all that out, it will take you a lot of time. Unless you have a lot of money, it can ruin you.”
Miller explains that in franchises, even though it’s also your business, you can’t do things your way as a franchisee.
“It’s an execution of their way inside your market,” she says. “Franchise business owners have great ideas, and there’s nothing wrong with them, but the model runs the way it runs, and you have to execute on how it works.”
The second difference relates to speed to profitability.
“At the end of the day, there is nothing different except the support and structure that overarches the franchise system. Your P&L (Profit and Loss) statement is going to look the same except that you pay a royalty to the franchisor. Either you take three to five years to figure all the systems out and what that’s going to cost you before you become profitable, stable, and scalable. Or, you purchase the systems, the stability, best practices, and ongoing support to launch and get profitable as soon as possible. That’s what a franchisor gives you.”
What to Know if You Are Buying a Business Opportunity
Because of the rising number of business opportunity scams over the past few years, the Federal Trade Commission (FTC) wanted to ensure business buyers’ safety. It created the Business Opportunity Rule as a result.
The rule requires business opportunity sellers to give prospective buyers specific information to evaluate a business opportunity and assess the risks. Armed with the knowledge, buyers can get a better sense of whether the deal is legitimate. If it’s not, they have grounds for legal proceedings with support from the FTC.
Libava advises business buyers to pay particular attention to earnings claims. In the past, companies have claimed that you could retire off of what you make stuffing envelopes or make thousands of dollars from a work from home scheme. The seller must substantiate these claims in writing and list how much other buyers have made and their location (since results may vary depending on many factors).
He says that buyers should know that they will have to sign a document stating that the seller can share their personal contact information with future business buyers.
The following tips will ensure you find a trustworthy business opportunity:
- Confirm that the seller has filled out the disclosure document about the business opportunity thoroughly and provided supporting documents;
- Contact the references the seller lists and ask questions about their experiences with the business opportunity;
- Look for business opportunities that illustrate how you’ll make money, rather than drawing you in with promises of big financial rewards.
With that said, let’s turn our attention to the other type of business opportunities: franchises. We will answer some important questions about the business model, aided by insights from Miller.
Which Franchise Makes the Best Business?
The best franchise business opportunities have demonstrated proven durability, stability, and profitability, regardless of the product or service they represent.
“Everyone asks what the ‘hot’ brand is,” Miller says. “That’s a good question, but it’s not what you need to know. The question is, how do I learn to identify the characteristics of the most durable, profitable companies?”
There isn’t a singular concept, category, business model, budget, or investment level that’s doing better than another, she says.
“There are hundreds of brands doing spectacularly well, that are outperforming normal system growth,” she added. “If the brand is growing quickly, it’s because the financial equation is exceptional, the leadership is proven, and it’s in the right sector for long-term durability. Hundreds of brands do that at varying levels.”
What Is the Most Profitable Franchise to Own?
From a profit margin-only standpoint, service-based businesses tend to fare better than other franchise opportunities, such as those in the food sector. That’s often the case due to lower overhead and operating costs. Many service businesses can run from home and need fewer employees. Service-oriented businesses aren’t just home-services (i.e., plumbers, electricians, or roofers) but can include everything from travel planners to yoga instructors to bookkeepers and more.
“If we’re talking profit margins, you see 10-15% out of food versus 20-30% from non-brick and mortar, perhaps home-based, service business,” Miller said. “Even though one-third of all franchises are food-related, their margins are lower.”
A quick internet search reveals an extensive list of the most profitable franchises, and you won’t be surprised which brand sits at the top: McDonald’s. The initial franchise fee of $45,000 seems equitable and affordable. However, the overall initial costs to the franchisee range from $1 million to more than $2 million, making it prohibitive for many.
From an initial investment standpoint, costs vary greatly based on the types of franchises. A simple retail franchise brand, such as Subway or Anytime Fitness, could run between $150 and $300K. More sophisticated retail franchises, like a Meineke Muffler or urgent care facility, will average between $300k and $750K. A home- or small office-based service franchise with no retail space and low overhead will range from $75 to $175K.
However, Miller emphasized that the amount you invest in the business does not necessarily correlate to how much profit you could expect to receive. It may be counterintuitive to think that, but it’s true nonetheless, she says.
Read about the Most Profitable Franchises.
How Do I Get Into the Franchise Business?
Getting into the franchise business starts with learning, according to Miller.
“To get into a good franchise business, you need to learn about the opportunities out there that match your goals, skills, and quality-of-life requirements,” she says. “The research process can take as little as a few months to years, depending on your commitment and if you enlist help along the way.”
She recommends that the franchisee start wide and then narrow down the business sectors of most interest. Then, find the top performers, those poised for real growth, and contact the franchisor.
“With a shortlist of good franchises, you begin due diligence, about an eight-week process guided by the franchisor representative,” she says. “You will be given all the information and materials you need to study to learn all you can about the opportunity.”
Miller stresses that the prospective franchisee carefully examine the Financial Disclosure Document (referred to as the “FDD”), a legal document required by law, which the franchisor must make available to the franchisee, that outlines each franchise business offering.
“[The FDD] is full of useful information, although it is written in legalese and can be cumbersome to get through,” Miller says, requiring the help of an attorney who specializes in franchises and other business opportunities.
See our Franchise Guide.
Is it Better to be a Franchise or Independent?
There is no one right answer to that question. It comes down to how much control the business owner wants to exert, the level of creative expression, and speed to profitability vs a willingness to operate based on the franchisor terms. There are many benefits to franchise ownership — brand recognition, training, co-oped advertising and marketing, and ongoing franchisor support — but that doesn’t mean franchising is right for everyone.
Miller advises that prospective business owners explore both franchises and other types of business opportunities to see which is right for them. She recommends that people ask: Can business ownership, in general, help me achieve my financial and lifestyle goals? Can a franchise do that or another business opportunity? Will I enjoy it and do well in it?
Neither option is a guarantee of success. But if owning a business is in your blood, as Miller says, it all starts with learning.