Franchise Vs. Business Opportunity Vs. License Model

Developing channels for new business development is many times what drives business leaders to consider franchising a business.  The problem is that there are so many definitions for an independent distribution system.  As a business owner considering whether to franchise your business, it seems clouded some times as to what the difference is between the options for structuring an independent distribution model.

A business opportunity, in the simplest terms, is a packaged business investment that allows the buyer to start a new business using a prescribed system of operation.  Usually, a business opportunity does not allow the seller to have control over the buyer and in most cases, there is very little ongoing relationship between the seller and the buyer.  In some cases, the seller will sell products to the buyer, but that’s about it.  In some cases, the business opportunity model can make sense if the business owner doesn’t have the concern for controlling the brand or what the buyer is doing in running the business.

One of the advantages of franchising over offering a business opportunity is that franchise regulations are managed federally by the Federal Trade Commission which offers a generally uniform structure to a national franchise offering.  This is done so through the Franchise Disclosure Document and allows for a relatively simple legal structure for an expanding franchise system.

Business opportunities require a unique registration in 23 states and can in many cases also require a bond being purchased in the state where the business opportunity is being offered.  Every franchise is a business opportunity, but not every business opportunity is a franchise.

Business opportunities may contain some or all of these attributes to be classified as a business opportunity offering.  Each of the 23 states with business opportunity regulations have different definitions and requirements as to what constitutes a business opportunity and therefore what would need to be registered as one in that state.

  • A business opportunity constitutes the sale or lease of any product, service, equipment and so on that will enable the purchaser-licensee to start their own business.
  • The 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.
  • The licenser-seller guarantees an income to be derived from selling their products or services.
  • The initial fee paid to the seller to start the business opportunity must be more than $500.
  • Any products or services developed by the seller-licenser will be purchased by the licensee-buyer.
  • The licenser-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.

These are the most common types of business opportunity ventures:

Vending Machine Routes. Vending Machine routes have become very popular in recent years, but the concept has been around for a long time.  People enjoy the idea of setting up vending machines and watching the profits come in without the work of a typica business model.  This typically is not the case at all and in order to make money, these concepts require a great deal of work and management to make profitable.  The investment is usually greater for this type of business opportunity venture since the businessperson must buy the machines as well as the merchandise being sold in them, but here the situation is reversed in terms of the payment procedure. The vending machine operator typically pays the location owner a percentage based on sales.

Distributorships. A distributorship involves a buyer entering into an agreement to offer and sell the product of another business, without being entitled to use the manufacturer’s trade name as part of the agent’s trade name – this differentiation is what separates a distributorship model from that of a franchised business model.

Rack Jobbing. This involves a buyer selling another company’s products through a distribution system of racks in a variety of stores that are serviced by the rack jobber or buyer of the business model.  In a typical rack-jobbing business opportunity, the agent or buyer enters into an agreement with the parent company to market their goods to various stores by means of strategically-located shelving units or displays in the stores.

 

For information on how to develop an independently owned distribution system to sell more of your products or services in new markets, contact us.

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