Just what is a business opportunity? That question has plagued a
great many people trying to decide whether to buy a current independent
business, a franchise,
or what we'll refer to in this text as a business opportunity. To allay
the confusion, we offer a simple analogy. Think back to elementary
school when your teacher was explaining the difference between a
rectangle and a square. A square is also a rectangle, but a rectangle
isn't necessarily a square. The same relationship exists between
business opportunities, independent businesses for sale
and franchises. All franchises and independent businesses for sale are
business opportunities, but not all business opportunities meet the
requirement of being a franchise nor are they in the strictest sense of
the word independent businesses for sale.
Making matters even more confusing is the fact that 26 states have
passed laws defining business opportunities and regulating their sales.
Often these statutes are drafted so comprehensively that they include
franchises as well.
Not every state with a business opportunity law defines the term in the same manner. However, most of them use the following general criteria to define one:
1. A business opportunity involves the
sale or lease of any product, service, equipment, etc. that will enable
the purchaser-licensee to begin a business.
2. The licensor or seller of a business
opportunity declares that it will secure or assist the buyer in finding
a suitable location or provide the product to the purchaser-licensee.
3. The licensor-seller guarantees an income greater than or equal to
the price the licensee-buyer pays for the product when it's resold and
that there is a market present for the product or service.
4. The initial fee paid to the seller in order to start the business opportunity must range between $400 and $1,000.
5. The licensor-seller promises to buy back any product purchased by
the licensee-buyer in the event it cannot be sold to the prospective
customers of the business.
6. Any products or services developed by the seller-licensor will be purchased by the licensee-buyer.
7. The licensor-seller of the business opportunity will supply a
sales or marketing program for the licensee-buyer that many times will
include the use of a trade name or trademark.
The laws covering business opportunity ventures usually exclude the
sale of an independent business by its owner. Rather, they are meant to
cover the multiple sales of distributorships or businesses that do not
meet the requirements of a franchise under the Federal Trade Commission
(FTC) rule passed in 1979. This act defines business offerings in three
formats: package franchises, product franchises and business opportunity
ventures.
In order to be a business opportunity venture under the FTC rule, four elements must be present:
1. The individual who
buys a business
opportunity, often referred to as a licensee or franchisee, must
distribute or sell goods or services supplied by the licenser or
franchisor.
2. The licensor or franchisor must help secure a retail outlet or
accounts for the goods and services the licensee is distributing or
selling.
3. There must be a cash transaction between the two parties of at
least $500 prior to or within six months after the licensee or franchisee starts the business venture.
4. All terms and conditions of the relationship between the licensor and the licensee must be stated in writing.
You can readily see that the sale of business opportunities as
defined by the FTC rule is quite different from the sale of an
independent business. When you're dealing with the sale of an
independent business, the buyer has no obligations to the seller. Once
the sales transaction is completed, the buyer can subscribe to any
business operations system he or she prefers. There is no continued
relationship required by the seller. Business opportunity ventures, like
franchises, are businesses in which the seller makes a commitment of
continuing involvement with the buyer.
