What distinguishes franchising from business opportunities?

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What distinguishes franchising from business opportunities?

F. Georges Sayegh, A.S.D., C. Adm., Fellow CMC of Quebec and Ontario, is an expert- consultant in franchising and technology transfer. He is also the author of 18 books on franchising and related businesses. To reach him: gsayegh@gsayegh.com; Tel: (514) 216-8458.

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Whether it's home appliances, auto and truck services, soft drinks, children's services, apparel, computer training, construction services, dating services, coffee machines, decorative concrete coating systems, education, food service, milk routes, potato chips, or decorative back patios, to name but a few, franchises and business opportunities can be found in any of these areas and more. But what exactly distinguishes one from another?

Whether it is higher prices at the gas pump, the rising costs of basic groceries to feed their families, the price of apparel to clothe their children, or the skyrocketing cost of electricity, many entrepreneurs are being pushed into a serious crisis of their own. Nowadays, they are looking for other ways to supplement their income to meet all these increases in the cost of living. Understanding the difference between franchising and business opportunities will help them know which project to choose and whether they can afford the cost of one project over the other.

In order to describe the difference, the author has extracted some definitions from the dictionary entitled "English-French Dictionary and Lexicon on Franchising" which he published in 2017.

Franchising – Contractual relationship between two independent parties whereby the licensor grants the licensee the right to operate a business, render a service, or distribute or manufacture a pre-tested product under its trade-mark, according to its commercial or industrial methods, defined standards, continuous know-how, and commercial assistance for the limited duration of the agreement, for a fee (franchise fee and royalties) in a given territory.

Business opportunity – Opportunity presented to a prospective investor by a promoter. In provinces with existing franchise laws, an investor must refer to the definition of a franchise in order to determine whether a business opportunity is a franchise or not and therefore subject to disclosure obligations prescribed by law. In addition, some business opportunities are subject to the Competition Act (multiple-level sales) or the Securities Act (investment contracts) or other federal or provincial laws.

That said, running a franchise is a way for entrepreneurs to start a business without building a brand from scratch. By acquiring a franchise, the operator benefits from the following:

  1. Trademark

    The franchisee operates the business under the franchisor's brand.

  2. Established business model

    The franchisee benefits from an established business model, which can reduce the risks associated with starting their own business.

  3. Know-how of the franchisor

    The franchisee benefits from probably experienced techniques, support, and ongoing training, while business opportunities do not have a built-in support system.

  4. Financial counterpart

    In exchange, the franchisee usually pays an upfront franchise fee and ongoing royalties.

  5. Delimited territory and a limited duration

    A franchise system requires the franchisee to operate their business in a specific territory (a shopping center, an airport, a university, a hospital, etc.) for a period of 5 to 20 years.

A franchise system requires the franchisee to operate their business in a specific territory (a shopping center, an airport, a university, a hospital, etc.) for a period of 5 to 20 years.

Compared to franchises, business opportunities have no upfront costs and generally do not involve ongoing royalty payments. The operator is free to market under its own brand and its own system,and the seller has no ongoing obligations to the buyer.

Additionally, "Biz opps" refers to a business venture that does not involve the purchase of a franchise. Unlike franchises, business opportunities generally do not have a recognizable brand or established business model. Instead, entrepreneurs who invest in business opportunities must build their business from scratch.

  Franchise Biz opps
     
Costs Upfront fee and ongoing royalties No upfront fee or ongoing royalty payments
Structure Very structured with no deviations without the franchisor’s authorization which ensures a uniform system Less structured, which allows the operator to set up his own system. This allows him flexibility of action
Support Initial and ongoing training as well as continuous support After the business is established, there is little contact between the seller and purchaser
Legal Regulation In Canada and the United States, almost all provinces or states are governed by the Disclosure Act. Franchisors must provide a franchise disclosure document to the franchisee No special disclosure other than regular business laws
Potential benefits i. Immediate recognition of the franchisor's brand. ii. Benefit from advantageous purchasing conditions i. Low business start-up cost. ii. No binding commitment to the seller.
Potential drawbacks

i. Long-term, binding relationship often with little opportunity for exiting and the potential for ongoing payment obligations even after termination

ii. Potentially limited growth opportunity, depending on exploitation rights

i. Limited (if any) support from the seller.

ii. No track-tested trademark or proven business system. iii. Revenue potential and margins are often limited.

In conclusion, the entrepreneur considering acquiring a franchise or starting their own business opportunity should do their due diligence before investing in either option.

In addition, the future entrepreneur must surround himself with professionals (CPAs, CMCs, lawyers) specialized in the field of franchising and commerce.