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How to Research a Business Opportunity

Written by : Small Business Encyclopedia
2008-08-15
Protect yourself by learning what a business opportunity really is, how the government regulates them, and the steps you should take to ensure you've found the best opportunity available.

Just what is a 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 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 business opportunity law defines the term in the same manner. However, most of them use the following general criteria to define one:

  1. A 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 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 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 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 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 businesses that do not meet the requirements of a franchise under the Federal Trade Commission (FTC) rule passed in 1979. This act defines business offerings in three formats: package franchises, product franchises and business opportunity ventures.

In order to be a business opportunity venture under the FTC rule, four elements must be present:

  1. The individual who buys a 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. 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 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 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.


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