Reality Check

The experiences of Entrepreneur One and Entrepreneur Two take place every day in the United States, as hundreds of new entrepreneurs try their wings with entry-level business opportunities. What makes the experiences of Buyer One and Buyer Two so different? Homework, that's what.

Finding the right business opportunity for you will ultimately depend on your good judgment, your business sense, thorough research and street smarts. And as with most things in life worth doing, there are no shortcuts.

Let's take a look at the only way to research a business opportunity investment-one step at a time.

1. Be aware that business opportunities are inherently risky investments. Understand going into it that any business opportunity investment will put your funds at risk. It's just the nature of the beast. Any success you experience will be entirely due to your own drive and ingenuity in using the tools the business opportunity program provides. Of course, you can-and should-take steps to reduce the risks as much as possible (many are noted in "Check It Out" below), but as with any opportunity, do not invest money you are not prepared to lose.

2. Understand the purchase decision is driven by information you don't have. A business opportunity buyer is at an immediate disadvantage. The information you need to make an informed investment is entirely in the hands of the seller, and the seller is selecting the sizzling information he is using to sell you the program.

Take another look at the mock advertisement at the beginning of this article. Of the information selected by the seller, you have learned the earnings potential of the business and the initial investment (part of the story at least), and the advertisement confirms your frustrations with your working life. The seller alone knows the real story of this alluring investment. Your task in this transaction is to level the playing field by digging for the right information.

For many-but not all-business opportunities, the Federal Trade Commission (FTC) requires a disclosure document be given to potential buyers. This document will spell out some of the basic information about the company making the offering.

But even if you are not given a federal disclosure document, 25 states regulate business opportunity sales in various ways. Most of them impose their own disclosure and registration standards. Recently, Illinois adopted a business opportunity law that became effective on January 1. It requires sellers to register with state authorities and provide buyers with complete disclosure at least 10 business days before the sale.

3. Find a business opportunity that will meet your needs. One size does not fit all. Your childhood friend may be entirely comfortable selling lingerie through an exclusive distributorship, while you may want to concentrate on sports equipment. The first step in any business opportunity investment is to examine your needs, dreams, strengths, weaknesses and financial resources. Concentrate on fields that draw on your interests, such as hobbies, crafts, activities and the like.

4. Be prepared to sell. A wise man once said that nothing happens until somebody sells something, and that is never more true than in operating a solo business opportunity. It is fair to say that most business opportunity programs apply the skills of an individual salesperson (that's you) to distribute products or services packaged by the seller. That means you had better be prepared to knock on doors, make telephone calls, hit the pavement, and bring your enthusiasm and personal drive to the effort.

5. Determine if a market exists. No amount of drive and determination can make up for a weak market for the product line or a weak product distribution system. If there is one common flaw in the world of business opportunity sales, it is that so many programs are based on products or services for which there is an immature market or the company is too disorganized to deliver the support needed to distribute products through a national distribution network.

Make your own decision about the need for the product or service you will be handling. Ask your friends and family if they like the product or service, if they would buy it, and what they would be willing to pay for it. Stand on a street corner and conduct your own market survey, or invite neighbors in for coffee and ask them to act as a focus group. If you get a consistently negative reaction from these usually reliable sources, proceed with caution: It may be that there is no real market demand for the product or service.

6. Protect your funds. Business opportunity sales are often structured to the buyer's disadvantage, with substantial payment loaded upfront. Whenever you pay in advance in business, there is a chance your money will be at risk. Products may not be shipped to you on time, the wrong materials may arrive, the other party may go out of business with your funds in his or her pocket, or-it's unfortunate, but it happens-the other party may have no intention of delivering the fair value as was promised. Getting your money back is nearly impossible in most of these situations.

Don't be afraid to negotiate the terms of your purchase. Just because the deal is structured for an immediate, upfront payment doesn't mean that is how you must structure your offer. Nor does it mean that is the only price the seller will accept. The savvy investor will pay at the same pace as the product or services are delivered.

Offer to use an escrow account arrangement so the seller is assured of timely payment, but do not expose yourself to the risks of the front-loaded payment. Then, if a shipment is delayed, the product is not what you ordered, or the quality is unacceptable, you are in a strong position when dealing with the seller. You can refuse the shipment and withhold payment until the situation is corrected.

7. Don't invest for the wrong reasons. The number-one wrong reason for buying a business opportunity is fear-fear of a job layoff, fear of no paycheck, fear of escalating debt, fear of not being able to provide for your family, fear of missing a onetime opportunity. Psychologists tell us fear is a secondary personal motivator and may not take us the distance in building a business. It also affects judgment; fearful buyers may be driven to an impulse investment by a clever sales pitch because they tend to leave their critical judgment facilities back in the shadows of their fear.

A second wrong reason: a blind belief in yourself without regard to the merits of the program you are buying. By all means, don't lose your enthusiasm or douse the fire in your belly driving you to succeed in business. You will need that energy to carry you through the start-up phase of any venture. There is, in fact, no more rare and valuable quality you bring to this dance. The potential problem: An unquestioning belief in your determination to pull yourself up by the bootstraps leaves you vulnerable to the sales pitch used in many business opportunity programs. Sellers will play on your belief in yourself and present their investment as a confirmation of your self-confidence.

The only right reason to invest is based on a rational evaluation of the opportunity. Leave your insecurities at the door.

8. Get training in fundamental business skills. It is easy to believe, while listening to the typical motivating sales pitch, that you can step into an unfamiliar business situation and succeed on sheer determination. Not so. You will need to study the fundamentals, such as sales techniques, negotiation, business organization, basic business law, money and people management. Take the time to learn these skills-it is an investment that will be every bit as important as the purchase of the business opportunity itself.

9. Check 'em out thoroughly. There is no substitute for doing your own research into the background, legitimacy and success of the business opportunity seller whose program you are considering buying. If you do not receive a disclosure statement, make sure you gather the basics: the name and address of the seller, names of owners and principals, copies of any contracts to be signed, written commitments regarding product purchase and delivery schedules, payment terms and a copy of the seller's financial statements. Also write down any significant promises or guarantees made verbally about the program.

Then go to independent third-party sources to check for problems. These include current operators (ask for a list in your area, and contact at least 10 of them), state consumer protection agencies (to check if you're in one of the 25 business opportunity regulation states, see "Laws of the Land" on page 165), the Better Business Bureau, and even the FTC.

Buying a business opportunity has its trap doors, but for the most part they can be avoided by thoroughly understanding the transaction, taking basic steps to protect yourself and adding a healthy measure of good old-fashioned common sense.

This article was originally published in the July 1996 print edition of Entrepreneur with the headline: Reality Check.