Protect yourself by learning what a new franchise business opportunity really is, how the government regulates new franchise businesses including retail franchises, and the proven business ownership steps required to ensure successful new franchise business ownership. Find new franchise, review available franchise opportunities and get started in owning a new franchise business. Just what is a new franchise business opportunity? That question has plagued a great many people trying to decide whether to buy a current independent business, a franchise, or what we'll refer to in this text as a new franchise business opportunity. To allay the confusion, we offer a simple analogy. Think back to elementary school when your teacher was explaining the difference between a rectangle and a square. A square is also a rectangle, but a rectangle isn't necessarily a square. The same relationship exists between business opportunities, independent businesses for sale and franchises. All franchises and independent businesses for sale are business opportunities, but not all business opportunities meet the requirement of being a franchise nor are they in the strictest sense of the word independent businesses for sale. Making matters even more confusing is the fact that 26 states have passed laws defining business opportunities and regulating their sales. Often these statutes are drafted so comprehensively that they include franchises as well. Not every state with a new franchise business opportunity law defines the term in the same manner. However, most of them use the following general criteria to define one: 1. A new franchise business opportunity involves the sale or lease of any product, service, equipment, etc. that will enable the purchaser-licensee to begin a business. 2. The licensor or seller of a new franchise business opportunity declares that it will secure or assist the buyer in finding a suitable location or provide the product to the purchaser-licensee. 3. The licensor-seller guarantees an income greater than or equal to the price the licensee-buyer pays for the product when it's resold and that there is a market present for the product or service. 4. The initial fee paid to the seller in order to start the new franchise business opportunity must range between $400 and $1,000. 5. The licensor-seller promises to buy back any product purchased by the licensee-buyer in the event it cannot be sold to the prospective customers of the business. 6. Any products or services developed by the seller-licensor will be purchased by the licensee-buyer. 7. The licensor-seller of the new franchise 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. The laws covering new new franchise business opportunity ventures usually exclude the sale of an independent business by its owner. Rather, they are meant to cover the multiple sales of distributorships or new businesses that do not meet the requirements of a franchise under the Federal Trade Commission (FTC) rule passed in 1979. This act defines new business offerings in three formats: new package franchises, new product franchises and new new franchise business opportunity ventures. (...to learn more about the rules and regulations for franchise and new business opportunities according to the federal trade commission, visit the Federal Trade Commission's New Franchise Opportunity Guidelines) In order to be a new new franchise business opportunity venture under the FTC rule, four elements must be present: 1. The individual who buys a new franchise business opportunity, often referred to as a licensee or franchisee, must distribute or sell goods or services supplied by the licenser or franchisor. 2. The licensor or franchisor must help secure a retail outlet or accounts for the goods and services the licensee is distributing or selling. 3. There must be a cash transaction between the two parties of at least $500 prior to or within six months after the licensee or franchisee starts the business venture. 4. All terms and conditions of the relationship between the licensor and the licensee must be stated in writing. You can readily see that the sale of business opportunities as defined by the FTC rule is quite different from the sale of an independent business. When you're dealing with the sale of an independent business, the buyer has no obligations to the seller. Once the sales transaction is completed, the buyer can subscribe to any business operations system he or she prefers. There is no continued relationship required by the seller. new franchise business opportunity ventures, like franchises, are businesses in which the seller makes a commitment of continuing involvement with the buyer. The FTC describes the most common types of new franchise business opportunity ventures as follows: Distributorship. Refers to an independent agent that has entered into an agreement to offer and sell the product of another but is not entitled to use the manufacturer's trade name as part of its trade name. Depending on the agreement, the distributor may be limited to selling only that company's goods or it may have the freedom to market several different product lines or services from various firms. Rack jobber. Involves the selling of another company's products through a distribution system of racks in a variety of stores that are serviced by the rack jobber. Typically, the agent or buyer enters into an agreement with the parent company to market their goods to various stores by means of strategically located store racks. The parent company obtains a number of locations in which the racks are placed on a consignment basis. It's up to the agent to maintain the inventory, move the merchandise around to attract the customer, and do the bookkeeping. The agent presents the store manager with a copy of the inventory control sheet which indicates how much merchandise was sold, and then the distributor is paid by the store or location which has the rack-less the store's commission. Vending machine routes. Very similar to rack jobbing. The investment is usually greater for this type of new franchise business opportunity venture since the businessperson must buy the machines as well as the merchandise being vended, but here the situation is reversed in terms of the pay procedure. The vending machine operator must pay the location owner a percentage based on sales. The big secret to any route deal is to get locations in high-foot-traffic areas, and of course, as close to one another as possible. If your locations are spread far apart, you waste time and traveling expenses servicing them. In addition to the three types of business opportunities listed above, there are four other categories you should be aware of: Dealer. Similar to a distributor but while a distributor may sell to a number of dealers, a dealer will usually sell only to a retailer or the consumer. Trademark/product licenses. Under this type of arrangement, the licensee obtains the right to use the seller's trade name as well as specific methods, equipment, technology or products. Use of the trade name is purely optional. Network marketing. This is a generic term that covers the realm of direct sales and multilevel marketing. As a network marketing agent, you would sell products through your own network of friends, neighbors, co-workers and so on. In some instances, you may gain additional commissions by recruiting other agents. Cooperatives. This business is similar to a licensee arrangement in which an existing business, such as a hotel or hardware store, can affiliate with a larger network of similar businesses, often for the sole purpose of advertising and promoting through a common identity. The FTC Rule, which has been in effect since the latter part of 1979, has had a broad-ranging impact on the franchise and new franchise business opportunity industry and would-be franchisees and licensees. The rule is designed to assure all prospective buyers, of either a franchise or new franchise business opportunity, that they'll receive a full disclosure containing the type of background information needed to make an informed investment decision. In spite of the FTC's rule and aggressive action at the state level, there are sellers who seek every possible means to escape regulation. Neither the FTC rule nor state regulations can guarantee freedom from fraud. That's why you should pay especially close attention to the FTC disclosure statement that is presented to you. Every prospective buyer of a new franchise business opportunity must receive the FTC disclosure statement at least 10 business days before signing a binding contract or paying money (or other consideration) to the seller. The 10-business day requirement is minimal. If you meet face-to-face with the licensor or a representative to discuss a proposed sale or purchase of the new franchise business opportunity, and if the conversation results in a serous sales presentation, the licensor must provide you with a disclosure document at that time. If you haven't received an FTC disclosure document, don't sign anything or pay out any money, even if claims are made that it is "refundable." If the seller doesn't give you a disclosure document, they're violating federal law and may also be violating state law. If the salesperson claims his or her offering is exempt from the FTC requirements, demand to see an opinion letter from counsel before dealing with them any further. Also ask the salesperson for the phone number of the local state agency or FTC office that has advised them they are exempt. Very few new franchise business opportunity offerings are exempt. The only major exceptions are those where the total initial payment within the first six months is less than $500, or where payment is made only for initial inventory sold at bona fide wholesale price. As a rule of thumb, a franchisee receives more support from the parent company, gets to use the trademarked name, and is more stringently controlled by the franchisee. New franchise business opportunities, on the other hand, don't receive as much support from the parent company, generally aren't offered the use of a trademarked name, and are independent of the parent company's operational guidelines. As we've previously noted, there are numerous forms of new franchise business opportunity ventures. Some are even turnkey operations similar to a lot of package-format franchises. These business opportunities provide everything you could possibly need to start a business. They help you select a location, they provide training, they offer support for the licensee's marketing efforts, and they supply a complete start-up inventory. Unlike a package-format franchise, however, these types of new franchise business opportunity ventures aren't trademarked outlets for the parent company. The company's name, logo and how it's legally operated are left solely to the licensee. Many times the only binding requirement between the seller and the buyer is that inventory be purchased solely through the parent company. Of course, all these stipulations are outlined in the disclosure statement and contract. Requires a lower initial fee than a franchise. Although the number of low-investment franchises has increased, the fee to get into a new franchise business opportunity is still considerably lower. The FTC requires a $500 minimum investment for an opportunity to be considered a new franchise business opportunity, but there are many that fall under this set fee, although most average around $2,000 to $3,000. A proven system of operation or product. Existing systems serve to maximize efficiency and returns and minimize problems. It's simply a matter of passing on experience, still the best teacher. Whether they admit it or not, most people like having their hands held once in a while. During crises, the parent company is there to help the licensee over the bumps. Many people like this idea of safety in numbers. Intensive training programs. In any new business, a lot of time and money are consumed during the learning period. A good new franchise business opportunity venture can eliminate the majority of ineffective moves through an intensive training program. Better financing options. Because of its financial size, credit line and contractual agreements, the parent company offering the new franchise business opportunity can often arrange better financing than an individual could obtain. Financial leverage is an important consideration in any investment situation. Professional advertising and promotion. Most small businesspeople don't spend sufficient money on advertising. When they do, their efforts are often poorly conceived and inconsistent. Many new franchise business opportunity ventures supply the buyer with print advertising slicks, radio ads, TV storyboards, etc., in order to provide a better marketing effort. Some new franchise business opportunity ventures will even have a cooperative advertising agreement under which they will split the cost of print, radio or TV ads. This type of marketing help is especially beneficial in large metropolitan areas where the cost of media is prohibitive to the one-shop owner. Ongoing counseling. Most new franchise business opportunity ventures offer support not only through training but also through counseling from a staff of experts who offer assistance that no independent could afford. Legal advice is available to a certain degree. The most efficient accounting systemsperfect for that particular businesshave been designed by experts in the field. Some licensors offer free computer analysis of records, and through comparison with other units can pinpoint areas of inefficiency or loss as well as profitable aspects of the business that are being neglected. Franchise Site selection assistance. Experts in site selection and marketing choose locations using all the scientific tools available. Professional negotiators arrange leases and contracts to the best advantage, using the power of a large organization to influence landlords and other important figures. Franchise Business Purchasing power. Many times, the parent company's tremendous buying power and special buying techniques can bring products, equipment and outside services to the licensee at a much lower cost than an independent could ever get. No ongoing Franchise royalties. In a new franchise business opportunity, unlike in a franchise, there are no ongoing royalties to pay to the seller. The profits are all yours. Under ideal conditions, business opportunities are a good, low-investment way to get into business with minimum risk and a good chance for success. But nothing in this world is perfect, so here are some problems that can be expected: Poor Franchise site selection. The majority of business opportunities are consumer-oriented retail operations which rely on good location, visibility and easy access to the establishment. Most buyers of business opportunities casually accept the locations chosen for them. DON'T! Look it over thoroughly yourself. You might even hire an outside marketing consultant to evaluate and possibly argue with the parent company's choice. Having a better locations could literally mean millions of dollars in profit over the course of 20 years. Lack of ongoing Franchisee support. There is usually no requirement for the new franchise business opportunity seller to offer ongoing support of any kind. If the seller decides not to supply information or guidelines that could help you once you're in operation, you may not have much recourse available to you. Franchise Exclusivity clauses. Are you restricted to selling only the manufacturer's merchandise? If this is the case and you deviate for any reason whatsoever, you run the risk of the licensor canceling the agreement. If you do buy from other sources, it will be very hard to hidemost parent companies will require you to open your books for examination at pre-designated periods of time. Any irregularities will be spotted at these times. Most smart buyers of business opportunities will negotiate the point in the agreement stipulating sources of supply in case product quality is inconsistent. Franchise Parent-company bankruptcy. Another pitfall is the possibility of the parent company overextending itself and going bankrupt. While this is not as serious in a new franchise business opportunity as it would be in a franchise, you still run the risk of losing the business because your property contracts may have been financed through the parent company. You should carefully investigate any new franchise business opportunity you're considering. Get a list of operators from the parent company and call them. Have a lawyer look over any agreement drafted by the parent company. Make sure you receive a disclosure statement. Then carefully evaluate the licensor. Don't let anyone hurry you. Make sure a responsible company backs the new franchise business opportunity. First make sure your new franchise business opportunity of choice complies with all new franchise business opportunity statutes--which vary from state to state--and is registered in states where required. Next, find out if the new franchise business opportunity you're interested in provides an offering prospectus to buyers. If it's a new franchise business opportunity that falls under the FTC rule, then it's required to disclose specific information to you. When choosing a new franchise business opportunity, keep in mind that if you buy an opportunity from a company with a sizable number of outlets that's been in business for at least three years, you'll pay more for this established concept that you would for a newer one. If you're considering a more recently established new franchise business opportunity, you should check out the parent company's history to evaluate its success and longevity in its particular field of operation. If you were to ask a business consultant how to evaluate the "right" new franchise business opportunity for you, you would probably receive these guidelines: 1. Make an honest evaluation of yourself and your franchise ownership abilities. If you've been behind a desk for many years, will you be happy calling on businesspeople and selling them an intangible service? If you've been a field salesperson for years, will you be satisfied selling snack foods behind a counter? 2. You must run your new franchise business enthusiastically. Will you be happy introducing a new product or an unusual service that the public knows nothing about? Can you generate excitement for an item not nationally advertised? 3. You must have complete knowledge of the franchise product or franchise service with which you are involved. If the parent company gives you little or no training in technical or management know-how, be wary of the new franchise business opportunity. If the licensor-seller has organized all the operating knowledge into a standard operating manual, look with favor upon this new franchise business opportunity. 4. Make a market evaluation of the franchise product or franchise service to be offered. Is the time right to introduce it to the public? Is there a need for this typ
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