What is the difference between a franchise and a biz-op? When does a biz-op cross the line and become a franchise?
A quick description of a business opportunity would be where one company provides the opportunity, for a fee, to another company or individual to go into business. Sounds like a franchise? It’s close, and even competent legal counsel can have difficulty sorting one from the other.
Many people get confused when comparing business opportunities and franchise opportunities. On the surface they may seem similar, but business opportunities (“Biz Ops”) and franchises are quite different.
In March 2012, the Federal Trade Commission’s new rule on Business Opportunities became effective. The purpose of the rule change was to cover a wider variety of business opportunities than under the previous rule, and to reduce the disclosure requirements for companies offering business opportunities. Under the FTC definition a business opportunity seller will provide one of three types of business assistance:
- Providing locations for the purchaser’s use or operation of equipment, displays, vending machines, or similar devices; or,
- Providing outlets, accounts, or customers to the prospective purchaser; or,
- Buying back any or all of the goods or services that the purchaser makes, including payment for such services as stuffing envelopes from the purchaser’s home.
According to the FTC, “The Business Opportunity Rule applies to commercial arrangements where a seller solicits a prospective buyer to enter into a new business, the prospective purchaser makes a required payment, and the seller – expressly or by implication – makes certain kinds of claims. Examples of what's covered by the Rule include work-at-home opportunities like envelope stuffing or craft assembly where the seller offers to buy back merchandise from the biz op buyer. Also covered: opportunities where a seller says it will help the buyer set up or run the business – for example, by providing the buyer with customers, accounts, or locations to sell products or services.”
In English, what the FTC is saying is that the new rule is expanded to cover business opportunities like vending machines, rack jobbers, 900-number phone opportunities, internet kiosks, work-from-home schemes like envelope stuffing, product assembly, medical billing, and even pyramid marketing opportunities.
The four major buckets of business opportunities are:
- Rack Jobber: The purchaser buys a route from the company, enabling them to service the company's clients by restocking the client with the company's products.
- Distributorship: The purchaser buys the rights to sell the company's product within a territory that may or may not be exclusive. The purchaser does not typically use the company's name or logo in identifying the business.
- License: The purchaser obtains the right for access to proprietary data or technology from which products or services can be offered to the public.
- Work at Home: The purchaser performs services from home that the company buys back such as envelope stuffing, medical billing, etc.
Advantages & Disadvantages of "Business Opportunities"
The major advantage of a business opportunity over a franchise is that it offers a buyer a greater degree of flexibility in conducting their business than a franchise, at a lower cost of entrance and without royalty payments. It is often a good method for home-based, part-time or second income businesses.
The most significant drawback of a business opportunity is that typically the business owner does not receive significant management systems, training, ongoing support, or marketing, which are typical in a franchise relationship.
25 states have regulations concerning Business Opportunities; some may have a different definition of what a Business Opportunity is in their state, or may impose different standards and disclosure requirements than required under the Federal Trade Commission. States with specific Business Opportunity rules are 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
The relationship in a Business Format Franchise is considerably more structured than in a business opportunity. While there are variations between the federal definition of franchising and some states’ definitions, under the FTC Rule the definition of a franchise is any continuing commercial relationship that includes the use of the franchisor’s brand by the franchisee and also contains the following elements:
- The right of the franchisee to offer goods and services identified with the franchisor’s brand;
- The requirement that the franchisee meet certain standards established by the franchisor in the use of its brand and system;
- The exercise of control or assistance provided by the franchisor in the use of the franchisor’s brand and system; and
- The payment of a fee by the franchisee.
Business Format Franchising generally refers to the system of delivery, not the specific product or services associated with the delivery as in a business opportunity or in Traditional Franchising. The major differences between a business opportunity and a franchise are generally found in the degree of the relationship:
- Branding - In a Business Format Franchise the franchisee is identified by the franchisor’s brand, while in a Business Opportunity the operator may not be identified by the brand, which is incidental to the products or services offered.
- Training, Marketing and Support - Franchisees generally receive training, marketing, and other support on a continual and ongoing basis from their franchisor, while in a Business Opportunity they may not be provided or may be incidental to the relationship.
- Exclusive Business - Franchisees generally offer products or services on an exclusive or semi-exclusive basis and are required to meet the brand standards of the franchisor, while in a Biz Op the operator may handle a variety of lines.
- Initial Fees - Franchise fees are generally substantial, while in a business opportunity there may be no initial fee or a much lower initial fee than is found in a franchise.
- Continual Fees - Franchisees generally pay a continual royalty, typically based on their gross sales of products and services, while in a Biz Op the operator generally pays for only the identifiable products or services supplied by the company.
In a biz op, the important element of the relationship is really the specific product or service that is being delivered.
In a business format franchise, while product is important, it is the system of delivery used by the franchisee to the public that is really the principal element in the relationship. Another major distinction is that the biz op owner generally does not use the company's name or logo in identifying their business as they would in a franchise.
You will often hear franchisors use the phrase that when you become a franchisee, "You are in business for yourself and not by yourself." It may not always be true in franchising, but after you sign a business opportunity agreement, generally speaking you are in business for yourself - period. If you are a true entrepreneur, a business opportunity may be the perfect vehicle for you to start a new business.