By Peter Siegal, Founder & Senior Advisor at BizBen.com
What’s the difference between a business opportunity and a going business for sale? They are NOT the same thing.
A business opportunity refers to all opportunities for those in the market to buy and own their own small business. But it’s not the same thing as a going business for sale.
These are five characteristics that distinguish a business opportunity an existing retail, service, restaurant or other kind of business that is for sale.
1. Customer, Employees, Location: An ongoing business will come with existing customers, employees, a known name and usually a distinct location. A business opportunity is an idea for providing products or services, and some of the methods and resources needed to implement the idea. Some business opportunities are meant to be operated from the buyer’s home or other facility obtained by the buyer.
Examples of business opportunities are service businesses such as placing and servicing vending machines, billing and related services for professionals, assembling finished products from parts provided, and selling products in a direct marketing system.
2. Established Track Record: An ongoing business has an operational history –producing revenues and earnings for the owner, and establishing and building relationships with customers and suppliers. A business opportunity will be a new business so it has no track record. If the buyer wants to know if the sales, earnings and other projections made by the seller are likely to be realized once the business is started, they should understand this difference.
3. Risk. Many buyers believe a business opportunity is a riskier investment because there is no proof will be successful in the territory or region where it is being offered. By contrast, a going business has a known operating track record.
4. Cost: A business opportunity can usually be obtained for less money than buying an existing business. But a business opportunity may require additional cash to operate. You might have to purchase inventory, equipment, fixtures or other assets to operate the business. You might also have to pay for “soft” assets, such as training and trade name. By contrast, the business serving customers for awhile will usually cost more a buyer would be required to purchase goodwill–also called “going business value,” and often a covenant not to compete.
5. FTC Regulations: The Federal Government has little reason to get involved in the way an existing business is offered and sold, unless the business that requires Federal licensing. The Federal Trade Commission has established rules for the way a business opportunity can be sold. FTC requires sellers to 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. The government got involved after buyers complained about business opportunities sold with false or misleading information.
So, a buyer of a business opportunity must complete the due diligence process takes place before there is any agreement for purchase. When you buy an ongoing business, you complete that process after buyer and seller have agreed on price and terms. That contract includes the provision allowing the buyer the right to analyze and learn more about the business–to make sure the company operates and performs as represented. Due diligence must be completed before the contingency is removed and the transaction can close.
When considering the purchase of a business opportunity, a buyer should call on other buyers of that opportunity and learn their experience. And conduct other common sense methods of investigation before signing on the dotted line.
About: Peter Siegel, MBA is the Founder & Senior Advisor (ProBuy & ProSell Programs) at BizBen.com, where this post originally appeared. he works with business buyers, owners/sellers, intermediaries, agents, investors, and advisors).Read More