Business opportunity 500 - Cover Story - Directory

Entrepreneur, July, 1996

BUYING A BUSINESS OPPORTUNITY offers many enticements--low start-up costs and the promise of profits foremost among them. But even if the opportunity you're considering costs far less than, say, a new car, you should still kick the tires before you sign on the dotted line.

Why bother? Well, even an opportunity that doesn't break the bank still has the potential to change your life--that is, if it's the right one for you. So spend the time to investigate the company before you get involved.

Perhaps the best place to start your investigation is by understanding just what a business opportunity is. The term "business opportunity" is often misunderstood because it encompasses so many types of businesses--including franchises. In the most general terms, a business opportunity is any opportunity that enables you to make money. Specifically, it refers to the sale of a product or service in which the seller promises buyers they will make a profit, that there is a market for the product or service, or that the seller will buy any unsold merchandise back from buyers.

While every franchise is a business opportunity, not every business opportunity is a franchise. To meet the definition of a franchise, a business opportunity must fit three specific criteria set by state and federal law: The franchisee must 1) pay a fee to the franchisor for the right to offer certain products or services; 2) use the franchisor's name, trademark and service mark; and 3) operate and market the business according to processes and standards set by the franchisor. A business that does not meet all three of these requirements is considered a nonfranchise business opportunity.

Buying franchises and business opportunities allows would-be entrepreneurs to bypass the headaches involved in starting a business from scratch. With both kinds of businesses, you benefit from the help of a seller who already knows the ins and outs of operating the business successfully. The major difference between franchises and business opportunities is in the degree of support you will get.

Franchises generally offer quite a lot of assistance; by the same token, they also insist you follow specific rules and strict operating methods. Business opportunities offer more freedom; they let you run the business any way you desire. However, that also means less support. While most business opportunity sellers will answer your questions over the phone--and some even provide as much assistance as a franchisor--in most cases, after the seller gives you basic guidelines and enough product to get started, you're on your own.

Because business opportunities generally cost far less than franchises, they are often a great way to get into business on a budget. And you won't have to worry about the ongoing royalties or other continuing fees that franchisees are usually subject to.

To research an opportunity, start by finding out how long the company has been in business. Is it registered under any state business opportunity laws? Twenty-five states have such laws (see "Laws of the Land" on page 165), but many business opportunity sellers don't realize the laws apply to them, and opportunities that cost $500 or less are exempt.

When beginning your research, it helps to understand how each company fits into the world of nonfranchise business opportunities. There are no universally accepted terms for these opportunities, but based on our research, Entrepreneur divides them into five groups: dealers/distributors, licensees, multilevel marketing/direct sales businesses, vending machines and cooperatives.

1. Dealers/distributors are individuals or businesses who purchase the right to sell ABC Corp.'s products but not the right to use ABC's trade name. For example, an authorized dealer of Minolta products might have a Minolta sign in his window, but he can't call his business Minolta. Often, the words dealers and distributors are used interchangeably, but there is a difference: A distributor may sell to several dealers, while a dealer usually sells direct to retailers or consumers.

2. Licensees are licensed to use the seller's trade name, in addition to certain methods, equipment, technology or product lines. If Business Opportunity XYZ has a special technique for reglazing porcelain, for instance, they will teach you their method and sell you the supplies and machinery needed to open your own business. You can call your business XYZ if you want, but you are an independent licensee.

3. Multilevel marketers and direct sales companies sell to their friends, neighbors, co-workers and so on. In some cases, they earn extra commissions by recruiting new salespeople to the company.

4. Vending machines are provided by the seller, who may also help you find locations for them. You restock your own machines and collect the money.

5. Cooperatives, a looser version of a licensing arrangement, allow an existing business to affiliate with a network of similar businesses, usually for advertising and promotional purposes.