Sniffing Out a Good Business Opportunity
Learn how to invest your IRA or 401k into a franchise penalty-free. ($50k min)
We are all a little vulnerable right after the holidays. After so much good cheer, our defenses may be down a little, especially if we have been unemployed for a while. All of a sudden, some of those spam e-mails offering "The Greatest Homebased Business...Ever" or "Raise Chinchillas in Your Backyard for Big $$$$" start to look just a wee bit attractive.
Many of these "come on" offers are actually quite legal. They are known to lawyers as "Business Opportunities" (note the capital letters). A Business Opportunity is like a franchise, except that you don't operate under someone else's registered trademark that has a recognized value in the marketplace. Common examples of Business Opportunities are:
- "Distributor" deals in which you help the seller find local buyers for their merchandise, or you find locations for the use or operation of vending machines, racks, display cases, other similar devices or currency-operated machines for the seller's merchandise on premises that neither you nor the seller owns or leases.
- "Supply" deals in which the seller agrees to buy any products you make, produce, fabricate, grow, breed or modify using the stuff that the seller sold you (remember those chinchillas?).
Just because they're legal doesn't mean that Business Opportunities are always good deals. As with a franchise, the burden is on you to research a Business Opportunity and make sure it's on the level. Many states require Business Opportunities, as well as franchises, to register with a state government agency (usually the state's Bureau of Securities or Attorney General's office) before they may legally offer their program to state residents. Call or e-mail the appropriate agency and find out if the Business Opportunity that interests you is registered.
Then ask the Business Opportunity to furnish a list of people in your area who have bought into the program, with home addresses and telephone numbers. Get into your car, visit each one of them in person, and view their operation with your own eyeballs. Do not just call or e-mail them--many unscrupulous Business Opportunity promoters have "boiler rooms" of people sitting in cubicles pretending to be satisfied customers. Some even encourage these employees to bring their kids to work so that it sounds as if they are working from home!
Proceed With Caution
You should be suspicious of any Business Opportunity if:
- They require a big upfront, nonrefundable fee, especially if it's an unusual amount (such as $5,725 or $6,950).
- They require you to pay a fixed amount on a regular schedule (for example, $50 a month) regardless of whether or not you make money (a percentage of sales may be OK, because if you don't make money, they don't either).
- They refer to you as an "affiliate" or "member" but prohibit you from mentioning their name when dealing with customers or suppliers.
- They say they prefer to deal with "people who have never been in this business before."
- Their brochures and Web site do not offer any background information about their top management.
- Their brochures and Web site do not indicate an affiliation to a larger, well-known organization or a listing of endorsements from companies in the same industry such as Entrepreneur Media Inc. or Yahoo! Small Business."
When negotiating your deal with a Business Opportunity, make sure:
- A lawyer reviews the agreement before you sign--if the seller refuses to permit this, or seems nervous about it, then you know for sure you are dealing with a fraud.
- The agreement allows you to get out of the Business Opportunity at any time, without penalty, if you are not satisfied.
- The seller agrees to refund your money if you quit the Business Opportunity during the first six months, less the seller's actual cost of providing you with training or other services in an amount not to exceed 10% of your total investment.
- The seller says that it is in compliance with all material laws, rules and regulations, including the Business Opportunity registration law in your state (if any) and all federal antiterrorism and "money laundering" laws (you never know--your Business Opportunity may be forwarding your payments to Al-Qaeda).
- The seller indemnifies you for any legal risk involved in the Business Opportunity (in other words, if anyone comes after you saying you're doing something illegal, the seller will defend you and pay all your bills).
Finally, use common sense, and remember that if it's too good to be true, it probably is. Ask yourself, If the Business Opportunity is that good, why do they have to use spam e-mail or comic book advertising to spread the word?
For reprints and licensing questions, click here.