QUESTIONS AND ANSWERS
By Mark McKeller

Q. In looking for a business to buy, I have noticed that there seem to be two general categories, franchises and business opportunities. What are the main differences? Which should I consider buying? Frank B., Torrance, CA.

A. In general, business opportunities are much less structured, less secure, - and less expensive than franchises. Business opportunity (bus op) companies tend to concentrate their efforts on putting as many people into business as possible, make their money on the business sale with less concern with long term relationships, and do not collect ongoing fees. Franchises, on the other hand, tend to be more expensive, but make less money on the front end because they provide considerable training and support. Their money is made through an ongoing relationship with their franchisees, and the ensuing royalties they collect.

The decision about whether to buy a bus op or a franchise really depends on the type of person you are. Franchise buyers tend to be those that feel the need for a very structured and supported business, often based upon a proven and successful track record -- and don't mind paying for it and sacrificing personal flexibility. Bus op buyers tend to be more maverick, have more confidence in making it on their own and would rather spend less money, have more flexibility -- and accept more risk. Franchise buyers often come from the corporate world, with no past business ownership experience, whereas bus op buyers are often lifelong entrepreneurs.

Franchise v. Business Opportunity

Financial: Franchises are almost always much more expensive than bus ops. Franchise buyers pay much more for name recognition, training and support -- and hope to have a higher chance of success as a result. Bus op buyers pay less money, but receive less support, and tend to struggle more often. In addition, franchises almost always charge their franchisees a perpetual royalty, whereas bus ops usually do not have ongoing fees.

Name recognition: One of the biggest advantages of buying a franchise is that you benefit from name recognition. Would you tend to get more business opening a McDonald's or Mom and Pop's Hamburgers? Using this name recognition as an asset, franchises tend to provide considerable advertising for their franchisees. Bus op buyers are responsible for developing their own credibility and doing their own marketing.

Training: Franchises often provide extensive preliminary and field training to their buyers. Bus ops may have some training, but it is usually minimal and finite.

Research and Development: Franchisees tend to expend considerable resources researching and developing new and different products and marketing concepts, so they have continued value to the franchisee. Bus ops tend to concentrate on selling their business concept, and less on continued research.

Flexibility: Franchise buyers submit to rigid rules and guidelines imposed by the franchise. It is intended to ensure consistence and success, but can severely limit the creativity and business flexibility of the franchisee. Bus ops tend to have fewer such restrictions, so the buyer is much more flexible in the way he can do business, and how creative he can be. People who want to do their own thing without being controlled by a parent company should buy a bus op.

Protection: Franchises are more heavily regulated and scrutinized than bus ops (another reason they cost more). Therefore, a buyer is less likely to be duped by an unscrupulous company when buyng a franchise.

Resale: Mainly because of name recognition and support, franchises tend to have a much higher resale value than bus ops.

Financing: Because of their high cost, proven record and stringent guidelines for operation, franchises tend to provide financing options to their buyers. Bus ops usually operate on a cash basis, and even take credit cards if the business is inexpensive enough.

Once again, your decision should really be based you. Do you have any business experience? Can you afford-- and accept the structure of-- a franchise? Or are you more independent minded and confident in your ability to make it on your own?