A Tale of Two Opportunities If you're considering buying a franchise or business opportunity, here's what you need to know before making your decision.

Homebased franchises and business opportunities offer investment opportunities built on a truly irresistible principle: Own a business, be your own boss, work out of your home and leave behind that hideous commute.

The basic appeal may be the same, but franchises and business opportunities are more different than they are alike. They share DNA--they both offer an opportunity to begin a new business--but each has distinct pros and cons. Understand those key differences, and your search for that perfect business investment can really pay off.

Comparing Investments

Lay the two investment concepts side by side, and their fundamental differences become evident. The similarities are simple enough: The investments both enable you to begin a business. That's about it for similarities. Every other aspect of the two investments falls in the differences column--the business opportunity is a one-time purchase, usually a part-time effort, and there is no continuing relationship with the seller. By and large, it is a smaller investment and does not feature ongoing royalties. The seller is a product provider, although some inexpensive guidance material is usually offered with the purchase. Trademark rights are usually not licensed to the buyer. The business opportunity seller is generally not available to provide business assistance when things go wrong. You're on your own.

Franchising is the more sophisticated investment-sophisticated in the sense of the greater number of moving parts. It is generally a full-time, absorbing business experience. The investment can be substantial; a freestanding franchised restaurant can easily cost you $500,000 in total investment. That said, the hottest growth sector in franchising today is the homebased business franchise. These programs are lower-level investments, often totaling no more than $30,000 to $40,000.

The franchisor is your operations partner, providing intense training and ongoing handholding. Of course, you buy that support for a price: You'll typically pay a $10,000 to $30,000 initial franchise fee and 3 to 7 percent of your business's weekly or monthly gross sales. You receive the right to identify your franchised business with the franchisor's (preferably well-established) trademark and to use its (preferably proven) operating techniques. When problems occur, the franchisor is there to walk you through them. You have the intrinsic benefits of purchasing power-as a member of a franchise system, you benefit from the strength of large numbers of buyers (think savings in volume discounts) when it comes to purchasing inventory and supplies. With a franchise, you have a valuable senior partner in your business.

With a business opportunity, you buy a package of goods and services, and there is little or no continuing relationship. If there is a continuing relationship, it's usually no more than that of a product supplier to your business.

Evaluating a Business Opportunity

The single most important aspect of a business opportunityinvestment is your fit with the program. Does it fit your plans,the skills you bring to the program and your financial resources?No amount of great product, substantive training or glossybrochures can overcome a poor fit. The best answer to thischallenge is to assess your goals, how you think a businessopportunity can help you reach those goals, and what you expect toenjoy most about being in business. Be sure to write down yournotes on these thoughts and keep them nearby for reference.

What is the most common mistake people make when deciding topurchase business opportunities? As you look over the seller'smaterials, you may delude yourself into the purchase: "Thisproduct or service is so good (or cheap or valuable or innovativeor clever) that it will sell itself. " Banish this thoughtimmediately! There is nothing-nada-that is so good it will sellitself. You had better be prepared to do some selling. That meanscold-calling people who won't give you the time of day.You'll have a lot of doors closed in your face and phoneprospects hanging up on you-you have to be prepared for thatbruising experience. How are your sales skills? Most businessopportunities, when you boil down the hype and enthusiasm, arelittle more than independent sales jobs that you own, so yourskills need to be sharp.

Gathering information about a particular business opportunityinvestment can be difficult. The person you most want to interviewis someone who purchased the business opportunity and has had somesuccess with it. Ask the seller for a list of owners in your partof the country. Assuming you receive a list, get on the phone withsome of them. The key question to ask: "Knowing what you knownow, would you make this purchase again?"

A body of federal and state laws purports to regulate businessopportunity sales (see "The Regulators" on page 30), butunlike the franchise laws discussed below, the statutes areinconsistent in their definitions of what constitutes a businessopportunity, and they do not cover much of the hyperactive businessopportunity marketplace. Despite the designs of the legalauthorities, odds are that you probably won't receive any sortof meaningful disclosure document. Make up for it by asking theseller the right questions (see "Question Everything" onpage 31).

You could also visit the company headquarters to get a personalimpression of the business. This won't be practical in manysituations (why make a $1,000 trip for a $650 investment?), but itstarts to make more sense at higher levels of investment. Check inwith the BetterBusiness Bureau and the FTC, and by all means contact your state consumerprotection authorities for information on a particular seller or onbusiness opportunity investments in general.

Evaluating a Franchise

Finding a comfortable fit is also important in making afranchise investment. There's a wide variety of businessesavailable; your job is to find one you'll enjoy building andoperating. Yes, it should be a fresh, vital business conceptthat's going to be around for a while, and it should have thepromise of profitability, but make sure you enjoy the operations.My wise youngest brother once told me that a prospective franchiseeshould not only understand the business, but also ask about thejob; that is, find out what you will actually do every day to makethe business a success. For example, a training business may appealto your inner professor but may require you to make three hours ofcold calls every day to generate clients. When evaluating afranchise investment, don't let the glamour of the businessblind you to the hard, everyday work at hand.

Franchise purchasers have a significant advantage over businessopportunity purchasers: A bodacious slab of information about theinvestment is handed to you on a silver platter in the form of anoffering prospectus, or Uniform Franchise Offering Circular.Federal law and many state laws require that all franchisorsdeliver a UFOC at least a couple of weeks before the buyer pays anymoney or signs a binding legal contract. If you are at all seriousabout a particular franchise, by all means, ask for a UFOC early inthe process.

A UFOC is designed to deliver a wide range of information aboutthe franchisor and its franchise offering. You'll learn aboutthe franchisor's business experience, its litigationbackground, financial dimensions of the franchise investment,detailed contact information about existing franchisees in thesystem, and background information on numerous other topics. In anexhibit to the UFOC, you'll find a copy of the form offranchise contract and a set of the franchisor's auditedfinancial statements. Given the investment's advantage of readyinformation, it's surprising how many people don't actuallyread the UFOC before jumping into the franchise. It'swell-organized and written in plain English, so it's not thattough to crack. Take the time to read it-it'll put you wellahead of the game.

The UFOC answers most of your basic questions and gives youinformation to drill down for a more detailed understanding of thefranchise. The UFOC won't tell you everything you need to know,but it does provide the basics. You take it to the next level bypreparing an accounting projection and a break-even analysis with agood accountant, considering locations and visiting with currentfranchisees. You can also work with an attorney to review the formof franchise agreement. You want to know from your legal counselwhat rights are granted and what obligations are imposed on thefranchisee, and whether any parts of the contract are unacceptableor injurious to your interests.

With a full list of franchisee contact information, your job ofcontacting franchisees is simplified. Get on the phone, makeappointments, then visit as many as you think are necessary to geta good cross section of views and experiences with the franchiseprogram. Ask the franchisees for their views on the franchiseprogram, the value of the training and support they have receivedfrom the franchisor, the everyday work involved in the business,and the profitability of their operations. Sure, you can ask themwhat their gross sales were last year and what kind of performancethey expect this year. Most franchisees will be candid and openwith you, and freely discuss their experience. Their views areimmensely valuable; they're not trying to sell you on theprogram, and they have firsthand experience. Don't expect 100percent smiles and sunshine about the franchise investment, but ifa majority of franchisees endorse the program and tell youthey're making a profit, that tells you a lot about the valueof the investment.

State authorities in franchise registration states can confirmover the phone whether a particular franchisor is registered tooffer and sell franchises in that state. They can also tell you ifinitial franchise fees must be deferred until you open for businessor if other financial protection is in place for investors in thestate. Any protective arrangement will be noted in Item 5 of theUFOC and in the state appendix.

Franchises and business opportunities: The DNA may be the same,but their differences run deep. Put in the time and effort toresearch the offerings, and you'll find a program that offersan exact fit for your needs.

For more information on buying a franchise or businessopportunity, visit BIZ Experiences's FranchiseZone.

Regulation & Investigation

The Regulators

The FTC is the federal agency that regulates the sale offranchise and business opportunities by requiring disclosure to bedelivered before the buyer makes a commitment. Check out itswebsite at www.ftc.gov for some useful overview information. Thestates also have a plethora of laws in these two areas. If you havea question, contact the attorney general or consumer-protectionoffices in your state. Whether or not your state specificallyregulates franchise and business opportunities, these offices canprobably help you.

The FTC and 14 Franchise Investment Law states require that adisclosure document be delivered. Then those states go further andrequire the franchisor to file with state authorities annually toreceive the right to offer franchises in each state. The FranchiseInvestment Law states are: California, Hawaii, Illinois, Indiana,Maryland, Michigan, Minnesota, New York, North Dakota, RhodeIsland, South Dakota, Virginia, Washington and Wisconsin.

Most of the state business opportunity laws also requirepre-sale disclosure and registration. The Business OpportunitySales Law states are: Alabama, 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.

Question Everything

If you're a serious franchise investor, you'll receive adisclosure document at least a couple of weeks before you signup-but maybe not until then (tip: Ask for one early). And ifyou're looking at a business opportunity investment, youprobably won't receive a disclosure document at all. Withoutthat valuable document in hand, you have to quiz the sellers forinformation they may not be serving up at their salespresentations. Here are some key questions you should get answersto:

1. What is the total investment I should expect with yourprogram?
2. How many business opportunities/franchises in your program havebeen purchased in the past six months? Have any been purchased inthis market? Can you give me the names and telephone numbers ofthose buyers? Can I also have the names and numbers of people whoquit the program in the last year?
3. How long have you been in business? Are you a member of theBetter Business Bureau? What is the name of the corporation makingthis offer? How substantial is the seller corporation? Can I have acopy of its current audited financial statement?
4. Has the company registered this offering with any state agencyas a franchise or business opportunity? If so, where? Does thecompany comply with the requirements of the FTC's FranchiseRule by delivering a disclosure document? If so, how can I arrangeto receive one?
5. Must your buyers sign any contracts to close the sale? How canI get a copy of the form of contract you use?

Andrew A. Caffey is a franchise attorney in the Washington,DC, area; an internationaly recognized specialist in franchise andbusiness opportunity law; and former general counsel of theInternational Franchise Assocation.