If you're in the market to buy a business, protect yourself
by being on the lookout for these 10 warning signs of a franchise
or business opportunity scam:
1. The Rented Rolls-Royce Syndrome. The overdressed,
jewelry-laden sales representative works hard to impress you with
an appearance of success. These people reek of money-and you hope,
quite naturally, that it will rub off on you. (Motto:
"Don't you want to be like me?") Antidote: Check the
financial statements in the Uniform Franchise Offering Circular;
they're required to be audited.
2. The Hustle. Giveaway sales pitches: "Territories
are going fast!" "Act now or you'll be shut
out!" "I'm leaving town on Monday afternoon, so make
your decision now." They make you feel that you'd be a
worthless, indecisive dreamer not to take immediate action. (Motto:
"Wimps need not apply.") Antidote: Take your time, and
recognize The Hustle for the crude closing technique that it
is.
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3. The Cash-Only Transaction. An obvious clue that
companies are running their programs on the fly: They want cash so
there's no way to trace them and so you can't stop payment
if things crash and burn. (Motto: "In God we trust; all others
pay cash.") Antidote: Insist on writing a check-made out to
the company, not to an individual. Better yet, walk away.
4. The Boast. "Our dealers are pulling in six
figures. We're not interested in small thinkers. If you think
big, you can join the ranks of the really big money earners in our
system. The sky's the limit." And this was in answer to
your straightforward question about the names of purchasers in your
area. (Motto: "We never met an exaggeration we didn't
like.") Antidote: Write your own business plan and make it
realistic. Don't try to be a big thinker-just a smart one.
5. The Big-Money Claim. Most state authorities point to
exaggerated profit claims as the biggest problem in business
opportunity and franchise sales. "Earn $10,000 a month in your
spare time" sounds great, doesn't it? (Motto: "We can
sling the zeros with the best of 'em.") If it's a
franchise, any statement about earnings (regarding others in the
system or your potential earnings) must appear in the Uniform
Franchise Offering Circular. Antidote: Read the UFOC and find five
franchise owners who have attained the earnings claimed.
6. The Couch Potato's Dream. "Make money in your
spare time . . . This business can be operated on the phone while
you're at the beach . . . Two hours a week earns $10,000 a
month." (Motto: "Why not be lazy and rich?")
Understand this and understand it now: The only easy money in a
deal like this one will be made by the seller. Antidote: Get off
the couch, and roll up your sleeves for some honest and rewarding
work.
7. Location, Location, Location. Buyers are frequently
disappointed by promises of services from third-party location
hunters. "We'll place these pistachio dispensers in prime
locations in your town." (Motto: "I've got 10 sweet
locations that are going to make you rich.") Turns out all the
best locations are taken and the bar owners will not insure the
machines against damage by their inebriated patrons. Next thing you
know, your dining room table is loaded with pistachio
dispensers-and your kids don't even like pistachios. Antidote:
Get in the car, and check for available locations.
8. The Disclosure Dance. "Disclosure? Well,
we're, uh, exempt from disclosure because we're, uh, not a
public corporation. Yeah, that's it." (Motto: "Trust
me, kid.") No business-format franchisor, with very rare
exception, is exempt from delivering a disclosure document at your
first serious sales meeting or at least 10 business days before the
sales takes place. Antidote: "Disclosure: Don't let your
money leave your pocket without it."
9. The Registration Ruse. You check out the franchisor
with state authorities, and they respond, "Who?" (Motto:
"Registration? We don't need no stinking
registration!") Franchisors are required to register in 15
states; in Florida, Nebraska and Texas, franchisors may file for
exemption. Antidote: If you are in a franchise registration state
and the company is not registered, find out why. (Some companies
are legitimately exempt.)
10. The Thinly Capitalized Franchisor. This franchisor
dances lightly around the issue of its available capital. (Motto:
"Don't you worry about all that bean-counter hocus-pocus.
We don't.") Antidote: Take the UFOC to your accountant and
learn what resources the franchisor has to back up its contractual
obligations. If its capitalization is too thin or it has a negative
net worth, it's not necessarily a scam, but the investment is
riskier.
Andrew A. Caffey is a practicing franchise attorney in the
Washington, DC, area; an internationally recognized specialist in
franchise and business opportunity law; and former general counsel
of the International Franchise Association.