The main differences between a business opportunity and a franchise typically lie in the nature of the relationship between the two parties.
A business opportunity, in simple terms, is when one company provides another individual or company with the chance to start a business, often for a fee. It may sound similar to a franchise, and the distinctions between them can sometimes be hard to determine, even for experienced legal experts.
Many people get confused when comparing business opportunities and franchises because, on the surface, they can seem quite similar. However, business opportunities (often called “Biz Ops”) and franchises have distinct differences.
Business Opportunity: FTC Definition
In March 2012, the Federal Trade Commission (FTC) updated its rule regarding business opportunities. The purpose of this change was to cover more types of business opportunities than the previous rule and to reduce the disclosure requirements for companies offering these opportunities. According to the FTC, a business opportunity seller offers one of the following three types of support:
– Providing locations for the buyer to use equipment, displays, vending machines, or similar devices;
– Offering customers, accounts, or outlets to the buyer;
– Buying back goods or services produced by the buyer, such as paying for services like envelope stuffing done at home.
The FTC states:
“The Business Opportunity Rule applies when a seller encourages a buyer to start a new business, the buyer makes a required payment, and the seller either explicitly or implicitly makes certain promises. Examples include work-at-home opportunities like envelope stuffing, where the seller promises to buy back what the buyer produces, or offers to help set up or run the business by providing customers or locations.”
In simpler terms, the FTC’s new rule covers business opportunities such as vending machines, online kiosks, work-from-home schemes like medical billing, product assembly, envelope stuffing, and even pyramid marketing opportunities.
The four main types of business opportunities are:
Rack Jobber: The buyer purchases a route from the company and restocks products for the company’s clients.
Distributorship: The buyer gains the rights to sell the company’s product in a certain area, but usually doesn’t use the company’s name or logo.
License: The buyer gains access to the company’s proprietary data or technology and can offer products or services based on that data to the public.
Work-at-Home: The buyer performs tasks from home, like envelope stuffing or medical billing, and the company buys back the finished work.
Advantages and Disadvantages of Business Opportunities
One of the main advantages of a business opportunity over a franchise is that it allows the buyer more flexibility in running their business, often with a lower cost of entry and no royalty payments. This can make it an attractive option for home-based or part-time businesses.
However, a major downside is that business opportunity owners typically do not receive significant management systems, training, ongoing support, or marketing assistance, which are common features of a franchise.
Twenty-five states have regulations regarding business opportunities. Some states may have different definitions or impose additional standards and disclosure requirements beyond those of the Federal Trade Commission. These states include Alaska, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia, and Washington.
Business Format Franchising Definition
In a Business Format Franchise, the relationship between the franchisor and franchisee is more structured than in a business opportunity. While there are some variations in the federal and state definitions of franchising, the FTC defines a franchise as a continuing commercial relationship where the franchisee uses the franchisor’s brand and:
– Is given the right to offer goods and services associated with the franchisor’s brand;
– Must meet the franchisor’s standards in the use of the brand and system;
– Receives control or assistance from the franchisor in using the brand and system;
– Pays a fee to the franchisor.
In a Business Format Franchise, the focus is on the system used to deliver goods or services to the public, not the specific products or services themselves, as in a business opportunity. Key differences between a franchise and a business opportunity include:
Branding: Franchisees use the franchisor’s brand, while business opportunity operators often do not.
Training, Marketing, and Support: Franchisees typically receive ongoing training, marketing, and support, which may not be provided in a business opportunity.
Exclusivity: Franchisees generally offer exclusive or semi-exclusive products or services, while business opportunity operators may deal with various product lines.
Initial Fees: Franchise fees are typically substantial, while business opportunities may have little or no initial fees.
Ongoing Fees: Franchisees pay ongoing royalties, usually based on sales, while business opportunity operators pay only for the specific products or services provided by the company.
In a business opportunity, the relationship is centered around the specific product or service being delivered. In a franchise, the system of delivery is the key part of the relationship. Another major difference is that business opportunity owners typically do not use the company’s name or logo, while franchisees do.
Franchisors often say that, as a franchisee, “You are in business for yourself, but not by yourself.” This might not always hold true, but once you sign a business opportunity agreement, you are usually in business on your own. For someone with an entrepreneurial spirit, a business opportunity might be the right choice for starting a new business.
Other Key Differences Between Business Opportunities and Franchises
– Branding: Franchisees use the franchisor’s brand, while business opportunity operators
may not.
– Training, Marketing, and Support: Franchisees receive continuous training and support,
while these elements may be limited in a business opportunity.
– Exclusive Business: Franchisees offer exclusive or semi-exclusive products and follow the
franchisor’s standards, while business opportunity operators may handle multiple product
lines.
– Initial Fees: Franchise fees are generally higher, while business opportunities often have
lower or no initial fees.
– Continual Fees: Franchisees pay ongoing royalties, while business opportunity operators
pay only for the products or services provided.
