The broadest meaning of a business opportunity is any set of circumstances under which an entrepreneur has the potential to make money. But there’s also a specific type of business opportunity that is subject to Federal regulation in the U.S. Under federal regulations, a business opportunity is a commercial arrangement where a seller offers a packaged opportunity to start a business. Think of it as a business in a box.
People often use the term business opportunity interchangeably to include a franchise opportunity. But there are actually distinct legal definitions for each term. This article explains the difference between a franchise vs business opportunity.
In 2012 the Federal Trade Commission (FTC) implemented a regulation1 called The Business Opportunity Rule to protect buyers when it comes to these “business in a box” offerings. This type of regulated business opportunity is sometimes referred to as a “biz opp” for short. The requirements for business opportunities are that the seller solicits a payment from the prospective buyer in exchange for a packaged business investment offering. These offerings may include: (i) locations for the use of vending equipment, (ii) clients, or (iii) a buy-back arrangement.
Over two dozen states also have laws regulating business opportunities.
Differences Between Franchises and Business Opportunities
A business opportunity is similar to a franchise in some ways, but there are real differences.
Franchise expert Joel Libava at The Franchise King points out that “sometimes, people confuse a franchise with a business opportunity. But a business opportunity is looser than a franchise. You buy the biz opp, learn how to run the business, and then you’re pretty much free to run it as you wish,” Libava says.
“The major differences are that franchises have more fees, more rules, and more support,” says Libava. “Fees are almost always significantly lower with a biz opp. In a business opportunity, the owner doesn’t have as many rules to follow compared with a franchise,” he adds.
Business opportunities can be nebulous. You may have never heard of a business opportunity before seeing an ad for it. Business opportunities include medical billing, envelope stuffing, craft assembly and other work-at-home opportunities. Biz opps also include vending machine routes.
Franchises, on the other hand, often have well-known brand names. They include burger franchises such as McDonald’s, coffee franchises such as Dunkin Donuts, or gas station franchises such as 7-Eleven.
A franchise is a long-term relationship usually providing a minimum of 10 years. Franchises require the owner to pay several kinds of franchise fees. The franchise business model requires strict adherence to a system and the franchisor generally provides more support to the buyer.
By contrast, a biz opportunity is a once-and-done sale usually. Typically you have no ongoing relationship with the other party. If you are independent and like to be creative, freedom from restrictions could be a positive for you.
In a franchise you must sell the franchisor products — and only its products. In return, the franchisor may be providing an exclusive or protected territory, training, service and product support.
By contrast, in a business opportunity you are free to do whatever you want. You may be completely on your own. The seller may do zero marketing for you.
Both franchises and regulated business opportunities require that the buyer receive a written disclosure from the seller before entering into an agreement or paying money. However, the franchise disclosure document is long and detailed. In comparison, the business opportunities disclosure2 requires much less information and is shorter.
Quality biz opps exist, but too many of them fall short of their promise. The buyer thinks he or she is getting a ready-to-go business, but in actuality gets a kit with some educational materials. Business opportunity scams are common.
Where Franchising Outshines Biz Opps
The franchise model has a proven track record. One party (the franchisor) grants the rights to another party (the franchisee) to operate a business using the franchisor’s trademark, products and services. Read: What is a Franchise?
While this may sound restrictive, it actually can be a benefit because you have a “partner” invested in your success. With a franchise, you’re not in business alone. You won’t get that in a business opportunity.
Mariel Miller, founder and CEO of The Franchise Advisor, a franchise consultancy, explains the franchise structure gives an entrepreneur valuable advantages.
“Let’s say I was going to start an independent business. If it’s all my own, everything from colors and brand name 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,” says Miller.
“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. 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 a franchise with 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,” Miller adds.
When you are a franchisee, even though it’s also your business, you can’t do things your way. You can’t create new products or decide on a radically different marketing strategy. You have to do things the way the franchisor wants. “Franchise business owners have great ideas, and there’s nothing wrong with them, but the franchise model runs the way it runs, and you have to execute on how it works,” she explains.
While you must accept certain restrictions in your operation, when you choose a franchise over a business opportunity, you’re getting an established business model and true benefits in the marketplace.
Comparison Chart: Franchise vs Business Opportunity
This chart summarizes and explains the major differences between franchises and business opportunities.
|Investment||The initial franchise fee is usually $25,000 to $50,000. Total investment to launch ranges from $75,000 to $500,000 -- or higher.||The price is often a few hundred to a few thousand dollars.|
|Fees||Franchisee must pay ongoing monthly, quarterly or annual fees and/or royalties.||Usually no fees required after the initial purchase price.|
|Brand||Many franchises have high brand recognition. Franchisees acquire rights to use the franchisor's trademark.||Biz opps are usually little known. Use of the brand name has little value.|
|Rules||The model includes strict rules to follow. A franchisee that fails to adhere could lose its franchise.||Usually no rules to follow. Buyers can do what they wish once they pay the purchase price.|
|Support||Franchisor provides ongoing support throughout the term of the relationship.||Usually the seller provides no post-sale support or very little.|
|Term||A contractual relationship usually with a minimum 10-year term.||May be no continuing relationship between buyer and seller. Often a one-time sale.|
|Disclosure||FTC requires extensive disclosure. Often 100 to 400 pages long.||Disclosure is one page.|
|Agreement||Lengthy agreement is the norm.||May be no contract, or a short one.|
|Regulation||Regulated by the FTC under 16 CFR Part 436. Over a dozen states require registration and some states have other requirements.||Regulated by the FTC under 16 CFR Part 437. Over 2 dozen states regulate business opportunities.|
Making the Right Choice
When deciding between franchise vs business opportunity, consider these six factors:
- Length of a contractual relationship you are willing to be in (franchise is longer).
- Your comfort level with following strict rules (a franchise has more rules).
- Whether you can find the funds required for the initial investment (franchises cost more).
- How much ongoing support and operating assistance you want (franchises offer more).
- Whether a well-known brand is important to you (franchises tend to have better brand recognition).
- The earning potential (franchises usually provide you with more earning potential).
The above six factors are generalizations. Evaluate every investment offer on its own merits.
Miller advises that a prospective business owner 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 I achieve my goals as a franchisee? What about with another business opportunity? Will I enjoy it and do well in it?
Neither path — franchise opportunities nor business opportunities — is a 100% guarantee of success. But if owning a business is in your blood, as Miller says, it all starts with learning.