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Netting a Winner

Protect Yourself

With this spotty patchwork of business-opportunity regulation, your best approach is to take measures to protect yourself. If you don't receive a disclosure document, you should gather the same core information that would have been delivered to you. Here is an outline of the information you should discuss with a representative of the company whose program interests you:

  • The full name and principal business address of the seller, and the name of the president of the company. Ask for a copy of an annual report or another set of financial information that shows the seller's financial stability.
  • Records showing whether the company or any of its executives have been named in any state enforcement actions for violation of franchise or securities law or other serious legal problems
  • All fees you must pay to the seller or its affiliated companies
  • Your total investment or the range of your total investment. If the program requires a computer or other equipment at your home office and the use of any particular software, find out in advance so you can fold in the expense.
  • Any supply arrangements or restrictions that may apply. If the seller offers an initial supply of product, find out exactly when that inventory will be scheduled for delivery.
  • A copy of any contract or agreement you must sign to acquire the program, so you can review it before you actually buy the package
  • A detailed description, in writing, of any territory rights you expect to receive
  • Any information the seller has detailing the sales experience of other owners. This is a sensitive question in the business-opportunity arena, and sellers will be cagey about answering it. Most business-opportunity laws prohibit a seller from delivering performance information to prospective buyers without providing it--carefully footnoted and explained--in the disclosure document.
  • Information about existing owners. Seek statistics (how many owners there are in your state, region and town) as well as the names, addresses and telephone numbers of all owners in your state. Why? You want to talk to several of them about their experiences. Be cautious if the seller gives you only one name or a small, select list. The experience of those owners may not be representative, or they may be earning a commission by helping the seller make sales.
Details, Please
For more information on how to research a business opportunity or a franchise, click here.

Evaluating the Opportunity

The biggest problem you'll encounter in evaluating a business-opportunity package is lack of information and unfamiliarity with the business context, and many sellers will do their best to exploit your disadvantage. For instance, imagine you're talking to a seller who, for $2,400, offers six tabletop "breathalyzer" machines that allow bar patrons to pay $2, blow into the machine, and learn their blood alcohol level based on an automatic breath analysis. The seller's rep makes it sound like a straightforward business: You place them in virtually any bar, and every week you collect money and replenish the blow straws. What could be easier?

What you don't know is how well the machines work, how often they break (and how you're going to fix them), and whether the technology is recognized by any police organizations. You also don't know anything about the business context: How are the machines really received by bar owners, will the bar owner want a portion of the machine's revenue, who must insure the machines, how many bar patrons will be interested in parting with $2 that they could apply to another beer, and how often are the machines destroyed by patrons dissatisfied with the readouts they receive?

While you're pondering whether "destruction by an enraged drunk" would be considered an act of God under your insurance policy, remind yourself to get in touch with people who have lived with these machines for a while.

If the business opportunity relies on a distinctive retail product line, like greeting cards or specialty snack foods presented in grocery stores on wire racks, you should evaluate the reliability of the product supply and whether the wholesale prices are comparable to those of competitive products in the market. Again, this is a challenge that comes with inexperience and being unfamiliar with the business context. If you had experience in the grocery store business, you would know what questions to ask and how to evaluate the wholesale prices.

Take your time in evaluating the offer. Despite what any sales representative tells you, there is no hurry. If the rep tells you he's only selling three packages in your town, the first two have been snapped up, and you had better make a decision quickly because he's leaving town at 5 p.m., you should give the rep a knowing smile and tell him you appreciate his closing technique. Don't allow yourself to be pressured, and don't put down substantial money on an impulse or after listening to an exciting presentation.

Take the idea to a couple of friends whose judgment you trust, and ask them what they think. Would they want to buy this product or service, and do they think it sounds like a good investment for you?

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This article was originally published in the May 2004 print edition of Entrepreneur's StartUps with the headline: Netting a Winner.

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