What To Consider When Researching a Business Opportunity

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The following excerpt is from the Staff of Entrepreneur Media’s book Start Your Own Business. Buy it now from Amazon | Barnes & Noble | iTunes

Buying a business opportunity

If a franchise sounds too restrictive for you but the idea of coming up with your own business idea, systems and procedures sounds intimidating, there is a middle ground: business opportunities.

A business opportunity, in the simplest terms, is a packaged business investment that allows the buyer to begin a business. (Technically, all franchises are business opportunities, but not all business opportunities are franchises.)

Related: How to Start a Business With (Almost) No Money

Unlike a franchise, however, the business opportunity seller typically exercises no control over the buyer’s business operations. In fact, in most business opportunity programs, there is no continuing relationship between the seller and the buyer after the sale is made.

Although business opportunities offer less support than franchises, this could be an advantage for you if you thrive on freedom. Typically, you will not be obligated to follow the strict specifications and detailed program that franchisees must follow. With most business opportunities, you would simply buy a set of equipment or materials, and then you can operate the business any way and under any name you want. There are no ongoing royalties in most cases, and no trademark rights are sold.

However, this same lack of long-term commitment is also a business opportunity’s chief disadvantage. Because there is no continuing relationship, the world of business opportunities does have its share of con artists who promise buyers instant success, then take their money and run. While increased regulation of business opportunities has dramatically lessened the likelihood of rip-offs, it is still important to investigate an opportunity thoroughly before you invest any money.

Legal matters

In general, a business opportunity refers to one of a number of ways to get into business. These include the following:

  • Dealers/distributors are individuals or businesses that purchase the right to sell ABC Corp.’s products but not the right to use ABC’s trade name. For example, an authorized dealer of Minolta products might have a Minolta sign in his window, but he can’t call his business Minolta. Often, the words “dealers” and “distributors” are used interchangeably, but there is a difference: A distributor may sell to several dealers, while a dealer usually sells direct to retailers or consumers.
  • Licensees have the right to use the seller’s trade name and certain methods, equipment, technology or product lines. If Business Opportunity XYZ has a special technique for reglazing porcelain, for instance, it will teach you the method and sell you the supplies and machinery needed to open your own business. You can call your business XYZ, but you are an independent licensee.
  • Vending machines are provided by the seller, who may also help you find locations for them. You restock your own machines and collect the money.
  • Cooperatives allow an existing business to affiliate with a network of similar businesses, usually for advertising and promotional purposes.
  • Network marketing/direct sales programs feature a low upfront investment — usually only a few hundred dollars for the purchase of a product sample kit — and the opportunity to sell a product line directly to friends, family and other personal contacts. Most direct-selling programs also ask participants to recruit other sales representatives. These recruits constitute a rep’s “downline,” and their sales generate income for those above them in the program.

Things get sticky when a direct sales network compensates participants primarily for recruiting others rather than for selling the company’s products or services. A direct-selling system in which most of the revenues come from recruitment may be considered an illegal pyramid scheme. That’s why it’s important to investigate carefully before investing any money.

Related: How to Find the Right Business Idea When Starting a Business

The FTC’s revised Business Opportunity Rule defines a business opportunity as “a commercial arrangement” in which:

  • A seller solicits a prospective purchaser to enter into a new business; and
  • The prospective purchaser makes a required payment; and
  • The seller, expressly or by implication, orally or in writing, represents that the seller or one or more designated persons will:
  • Provide locations for the user or operation of equipment, displays, vending machines or similar devices, owned, leased, controlled or paid for by the purchaser; or
  • Provide outlets, accounts or customers, including, but not limited to, internet outlets, accounts or customers, for the purchaser’s goods or services; or
  • Buy back any or all of the goods or services that the purchaser makes, produces, fabricates, grows, breeds, modifies or provides, including but not limited to providing payment for such services as, for example, stuffing envelopes from the purchaser’s home.”

If an opportunity meets this definition, the FTC requires that it provide a one-page disclosure document to prospective buyers, which includes information on legal actions, cancellation or refund policies, earning claims and the contact information of other people who have purchased the business opportunity.

There are also 26 states that regulate business opportunities: 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, Washington and Wisconsin. Different states have different definitions of what constitutes a business opportunity. If a seller meets the definition of a business opportunity in states that regulate them, it generally means he or she must register the offering with the state authorities and deliver a disclosure document to prospective buyers at least ten business days before the sale is made. (For more information on states’ regulations, check with consumer protection agencies — often a part of the attorney general’s office — in your state.)

Checking it out

Researching a business opportunity is a more challenging task than investigating a franchise. And if the business opportunity you are considering does not provide buyers with a disclosure document, you get a lot less information, so you have to do a lot more legwork on your own.

Whenever possible, follow the same steps you would for investigating a franchise. Check out Entrepreneur.com’s business opportunities listing (www.entrepreneur.com/bizopportunities/index.html). Contact the Better Business Bureau to see if there have been complaints against the company, and if the company is registered with D&B, a financial report will give you details on its financial standing and other information.

Also check with the regulatory agency — either the Commission of Securities or the Commission of Financial Institutions — in the state where the business opportunity has its headquarters. This will tell you if the company is complying with all state regulations. If you discover the company or its principals have been involved in lawsuits or bankruptcies, try to find out more details. Did the suits involve fraud or violations of regulatory laws? A copy of the petition or judgment, which you can get from the court that handled the case, will give you the answers to these questions.

Finally, see if the business opportunity seller will provide you with a list of people who have purchased the opportunity in the past. Don’t let the seller give you a few handpicked names; ask for a full list of buyers in your state. Try to track them down, and talk to as many as you can. Were they satisfied with the opportunity? Would they recommend it to friends?

Related: Need a Business Idea? Here are 55

The path to buying a business opportunity is not as clearly defined as the road leading to franchise ownership. The good news, however, is that you have more freedom to make your business opportunity work. More so than with a franchise, the success or failure of your business opportunity depends on you, your commitment to the venture and the level of effort you put into it. Put that same effort into finding the right business opportunity program, and your chances of success increase exponentially.

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