A business opportunity is the generic term referred to by sales intermediaries and sellers to describe all offerings available on the market for those who want to purchase and own their own small business.
But there is an important distinction between a true business opportunity and a going business that is on the market for sale. It's important for a buyer to know that difference, and to be familiar with the five characteristics that make a business opportunity different from an existing retail, service, food related or other kind of enterprise that is for sale.
Those five characteristics are:
1. The most obvious difference is that an ongoing business which an owner wants to sell will come with existing customers, employees, a known name and, in most cases, a distinct location. A business opportunity, on the other hand, is an idea for providing products or services, and some of the methods and resources needed to implement the idea. Ordinarily the business opportunity is meant to be operated from the buyer's home or a facility that the buyer is responsible to obtain.
Among business opportunities often promoted for sale are services businesses involved in, for example, placing and servicing vending machines, providing billing and related services for professional people, assembling finished products from parts provided, and selling products in a direct marketing system.
2. While an ongoing business has a history behind its operations--producing revenues and earnings for the owner, and establishing and building relationships with customers and suppliers, there is no track record for a business opportunity, because it will be a new business. This distinction is particularly important to a buyer who wants to know if the sales, earnings and other projections made by the seller are likely to be realized once the business is started.
3. In the opinion of many buyers, because there is no proof that a business opportunity will be successful in the territory or region where it is being offered, it seems a riskier investment than a business with a known operating track record.
4. A business opportunity typically can be purchased for less money than will be required when buying an existing business. The buyer of a business opportunity may need to purchase inventory, equipment, fixtures or other assets in order to operate. There also may be a cost for "soft" assets, such as training and trade name. By contrast, the business that has been in its location serving customers for awhile will almost always cost more because in addition to the hard assets, a buyer usually will be required to purchase goodwill--also called "going business value," and frequently, a covenant not to compete.
5. The Federal Government has little reason to get involved in the way an existing business is offered and sold. The exception might be a business that requires Federal licensing or in the event Federal laws are being broken in the way the business is operated or offered for sale. The FTC, however, has established rules for the way a business opportunity can be sold. Sellers must provide interested buyers with a disclosure statement seven days before that buyer can sign a contract or hand any money over to the seller of the opportunity. Included in the disclosure are names and contact information for other investors who have purchased the opportunity being offered.
This means that the due diligence process takes place before there is any agreement for purchase of a business opportunity. The reverse is true when an individual signs a contract to buy an ongoing business. That's because the buyer and seller have agreed on price and terms, but with a contingency that the buyer has the right to analyze and learn more about the business--to make sure the company operates and performs as represented--before the contingency is removed and the transaction progresses toward a close.
The involvement of the government resulted from complaints of business opportunities sold on the basis of information that was not factual, or without the buyer having the opportunity to verify the information before being committed to a deal. Buyers are cautioned, when considering the purchase of a business opportunity, to call on other buyers of that opportunity and learn their experience. And conduct other common sense methods of investigation before singing on the dotted line.
About: Peter Siegel, MBA is the Founder & Senior Advisor (ProBuy & ProSell Programs) at BizBen.com (established in 1994, 8000+ California businesses for sale, 500 new & refreshed postings/posts daily) he works with business buyers, owners/sellers, intermediaries, agents, investors, and advisors). Phone him at 925-785-3118 to discuss strategies regarding buying, selling, (or financing a puchase of) California businesses.
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