There is a difference between a business opportunity and an existing business that is for sale. The business opportunity term often is used to describe both a business idea offered for sale, and a company that has been operating for a while. It’s important that a buyer understands the distinction.
When someone interested in owning a small California business hears reference to a business opportunity, it could be meant in the broad sense to include the opportunity to buy an ongoing company, or to describe the opportunity to be in a business that has yet to exist. Examples include work-at-home situations like stuffing envelopes or assembling products from parts provided, furnishing billing or other services for dentists and other professionals, and direct marketing systems in which the investor buys a stock of home ware or other items, then works with people he or she recruits to make sales of that inventory to people they know. There is an important distinction that a buyer should understand, and four ways in which the two are different. They are:
1. If the food service business, retail shop or other kind of company being offered for sale has an operating history, with customers and suppliers, it’s obviously an opportunity to take over an enterprise that already has proved its value. What can be confusing is when sales people for a business opportunity are offering an idea for a company that may be working successfully in other locations, but will be established locally only if the buyer agrees to set it up--pay the seller for that idea and some of the resources needed to implement it.
2. A business opportunity ordinarily can be purchased with less money than will be required to acquire an ongoing business. The owner of an established company with a history of sales and earnings has several components of his business to sell, including hard assets – inventory, equipment, fixtures, and soft assets such as good will, customer list, some training from the seller and a covenant not to complete. There are fewer assets to offer with a business opportunity and it will have a smaller number on its price tag.
3. Higher risk is associated with a business opportunity as distinct from an ongoing business that already has established a pattern of selling to customers, collecting the proceeds, paying expenses and providing the balance for the owner to enjoy as payment for work performed and return on invested capital.
4. Because of this risk and the fact that some business opportunities turn out to provide less success for the owner than he or she was led to believe, the Federal Government has stepped in with rules about some of the ways a business opportunity can be sold. The most important of the regulations is the disclosure that sellers are required to provide to prospective buyers. Under this rule, no purchase can take place until at least seven days after the disclosure has been provide to the buyer. Chief among the provisions of the disclosure is the requirement that the seller provide names and contact information for others who have purchased the opportunity. That way, the prospective buyer can talk to owners in the business opportunity system to find out the benefits, the problems, and to ask if other buyers feel they made the right decision when committing to purchase the business opportunity.
The timing of due diligence is different with an existing business that is being sold. The buyer usually obtains an agreement with the seller on price and terms, with various contingencies, including the right to inspect the books and make sure the business does, in fact, perform as the seller reported. Only if the buyer is satisfied can the transaction move toward closing. But no agreement can be signed, no money can change hands for a business opportunity until the buyer has first had a chance to conduct the due diligence.
A sound business opportunity might be the right choice for a buyer who is ready to purchase his or her own business, but doesn’t have the money or skills needed to purchase an ongoing operation. But buyers need to be cautious about paying for a concept that has not yet proved to be successful.