Don’t fall victim to a business opportunity scam by doing your homework and being alert for investment fraud warning signs.
Every year, thousands of consumers across the nation fall prey to fraudulent business opportunity promoters, even though many potential entrepreneurs are diligent about meeting with the promoters, checking references and verifying the business’ legal status before they pay any money.
Indeed, the Federal Trade Commission (FTC) says that fraudulent business opportunities consistently rank in the top 10 categories in the FTC’s database of consumer fraud complaints.
A Maryland couple paid $35,000 for a vending machine business opportunity on the promise they could net $7,500 a month. They got a list of 25 business locations where they could place their machines. But when they tried to deliver the machines, none of the businesses wanted them. Six months after investing their money, the couple had yet to make $50.
A Michigan man invested more than $20,000 in an offer involving display racks of current music stars’ CDs and tapes, but he didn’t get the promised products. Instead, he got CDs and tapes of music from the 1960s, 70s and 80s. Many of the CDs appeared to be “used.”
Another man invested more than $10,000 in an opportunity in Florida involving candy machines. He found that the glass carousels on the machines didn’t allow the candy to stay fresh: It melted, cracked or turned to powder.
How to tell if your “Business Opportunity” is really a scam
These scams can be difficult to detect, but there are tell-tale signs of fraud that a savvy consumer can learn to spot. For example, many fraudulent promoters use the classified sections of newspapers and magazines to advertise the so-called opportunities. Many offers show up as spam email or in Internet ads. The ads typically involve vending machines for candy, soda, snacks or personal care items; display racks for greeting cards, compact discs, perfume, long distance phone cards, internet terminal sites or similar items; or opportunities to buy into medical billing or envelope stuffing businesses or activities related to the Internet.
Other tip-offs to fraud include claims of high pay in a short period of time (weeks or months) for little effort (“work only a few hours each week”), and claims about ideal work conditions, like the ability to “set your own hours,” “be your own boss,” or “work from home.” The opportunities may sell for several hundred dollars to tens of thousands, with the average cost about $5,000.
According to the FTC, many business opportunities offered through the classifieds or via spam email are “phantom” opportunities that have little chance of success – for example, a business with little or no demand in the market; cheap, low-quality or out-dated merchandise; poor customer service; and few, if any, locations. The locations that are offered often get little customer traffic.
What you can do about Business Opportunity Fraud
The FTC says it’s critical for consumers interested in buying a business opportunity to know their rights. For example, the FTC’s Franchise Rule requires most business opportunity promoters to provide certain kinds of information. Consumers should know to look for the information. If it’s not there, the opportunity isn’t worth pursuing.
The Franchise Rule
The FTC Franchise Rule is designed to protect would-be business owners from abuses by fraudulent promoters. The Rule requires promoters of business opportunities that sell $500 or more to provide prospective buyers with certain information. For example, if the promoter claims – even in an ad – that buyers can make a certain amount of money, data backing the income claim must be provided.
Promoters also must provide a franchise disclosure document that includes basic information about the promoter’s company, including whether it has faced any lawsuits from purchasers or lawsuits alleging fraud. In addition, the promoter must give potential purchasers the names, addresses and phone numbers of at least 10 previous purchasers who live closest to the potential buyer.
If you’re interested in pursuing a business opportunity, the FTC advises you to:
- Look at the ad. If it includes an earnings claim – but not the number and percentage of people who achieved it – the business opportunity seller is probably violating the law.
- Search the business opportunity’s franchise disclosure document for a statement about previous purchasers. If the document says there haven’t been any previous purchasers but the seller offers a list of references, be skeptical: the references probably are phonies.
- Get the list of 10 previous purchasers and interview each in person, preferably where their business operates. This can help reduce the chances of being misled by phony references.
Even if the business opportunity sells for less than $500 and is not required to provide this information the consumer should ask for in writing anyway.
Promoters of fraudulent business opportunities often use high-pressure sales tactics to get you to buy in. If it’s a legitimate opportunity, you should be able to take all the time you need to think things through before investing.
If the business you’re considering investing in claims to sell a major company’s products, verify the claim by giving them a call and asking if the promoter is on the up and up.
Get the advice of legal and accounting professionals before you sign any papers or pay any money. Create an escrow account if a deposit is required before the deal is closed.
Contact the attorney general’s office, state or county consumer protection agency and Better Business Bureau, both where the business opportunity promoter is based and where you live, to find out whether there is any record of unresolved complaints. While a complaint record may indicate questionable business practices, a lack of complaints doesn’t necessarily mean that the promoter and the business opportunity don’t have problems. Unscrupulous dealers will change names and locations to hide a history of complaints.
Reporting Possible Fraud
If you suspect a business opportunity of fraud, report it to:
- The FTC by filing a complaint online at www.ftc.gov or calling them toll-free 1-877-FTC-HELP (1-877-382-4357).
- The Attorney General in both your state and the business opportunity’s home state if different from your own.
- Local consumer protection agencies.
- The Better Business Bureau in both your state and the business opportunity’s home state.