Q: I've developed a great
business model and have tested it in three prototype units I've
established. It works like a charm, and I'd like to expand the
business by getting other people involved in order to grow it
rapidly. I thought about franchising it, but there seem to be so
many regulations that I'm not sure about this. I have a friend
who said I should just expand as a business opportunity without
being a franchise to save money and hassle. What's the
difference between these two strategies?
A: When most people analyze the
differences between these two strategies, they find they are
different in three key areas:
Ongoing Support. A franchise typically involves an
ongoing support commitment from the company to help the person who
gets involved in the business. Though this is sometimes also true
in a business opportunity, most do not involve a commitment to
provide this type of support.
Content Continues Below
Ongoing Fees. A franchise typically involves an ongoing
commitment on the part of the person entering the business to pay
fees or royalties for the continued right to use the brand and
operating system. A business opportunity usually does not have any
such ongoing payment commitment.
Common Brand. A franchise typically involves a
requirement that the person entering the business will operate
under a common brand with all other franchisees. A business
opportunity usually does not have such a branding structure for the
operator.
In a business opportunity, the typical approach is to prepare
material for supporting someone who wants to enter your business.
This material is designed to help them get up and running in the
business, but does not assume an ongoing relationship or a common
brand or operating system. As a company in a business opportunity,
you would typically charge a one-time fee for this assistance and
then the person who gets into the business would be on his or her
own after some initial training and support from you.
In a franchise, the typical approach is the same, except for the
assumption of a common brand and operating system. In addition,
there is an assumption that support services will be ongoing, so
the company has to create the overhead associated with support
staff (hence, one of the justifications for an ongoing fee).
There is no right answer in terms of which strategy is better-it
completely depends on the business model and your philosophy about
what you want to accomplish. You can safely assume that the initial
investment in franchising is going to be greater than for a
business opportunity, but the long-term revenue potential should
also be significantly greater due to the ongoing revenue
component.
It is also critical to understand that there are laws that
govern the activities of someone using either strategy to grow a
business. As a general rule, a franchise structure is more highly
regulated, but you need to understand that many states have
business opportunity statutes as well.
It is fairly easy to assume you're setting up a business
opportunity, only to find you've crossed the line and are
actually considered a franchise. Though less likely, it is also
possible to think you've set up a franchise, and yet some
business opportunity statues apply to your operation.
The only real safe option is to work very closely with an
attorney who specializes in this type of business structure setup.
The attorney will explain the differences between the laws
concerning both strategies and make sure you are complying with all
applicable statues. Your first step in terms of proceeding should
be to find the attorney you are going to work with and then analyze
these differences in-depth with this person.
Jeff Elgin has almost 20 years of experience in franchising,
both as a franchisee and a senior franchise company executive. He
is currently the CEO of FranChoice Inc., a company that provides free
consulting to consumers looking for a franchise that best matches
their needs. He can be reached at jelgin@FranChoice.com.
The opinions expressed in this column are
those of the author, not of Entrepreneur.com. All answers are
intended to be general in nature, without regard to specific
geographical areas or circumstances, and should only be relied upon
after consulting an appropriate expert, such as an attorney or
accountant.