Netting a Winner Before you chase down that business opportunity, make sure it's the right one for you. These tips will get you started.

Business opportunity. The very name of the investment concept captures the hope on which it is built. Excitement leaps off advertisements that do their best to convince would-be entrepreneurs they can make money, possibly a lot of money, with the product line or dispenser system or device they offer. Images of sudden wealth tantalize the imagination. Advertising text tells Horatio Alger-type stories of the rise from personal poverty to quick riches upon the discovery of that simple "secret"--and it can be yours!

The world of the American business opportunity sizzles with hope and possibility. The variety of business packages is staggering, and the promise of outrageous financial success is almost tangible. The challenge, of course, is to identify the real opportunities--the ones that will work for you--and to avoid weak or exaggerated (or worse) offerings.

The First Steps

The first task of any business--opportunity investor is to identify what you want out of the investment and what talents you bring to the business. For instance, if your priority is to be able to work at home, that limits the types of business packages that will fit your needs. Do you want to work part time only, or would you prefer to do seasonal work at a particular time of the year? Jot down your thoughts and plans; it will help you considerably when you plunge into the business-opportunity marketplace.

You should also give some thought to the type of work you want to do. If you want to get out and deal with people face to face, make a note of it. If you're seeking an ambitious sales program with an attractive line of products, this will send you in yet another direction.

Finally, figure out how much money you want to make. Be conservative in your estimates of what you can generate with the business opportunity, and by all means, pay no attention to any exaggerated revenue-potential claims your sales representative makes. Plan on a slow start as you learn the business, and a steady growth rate based on the time and energy you plan to commit to the effort.

Assess the Risks

How much money can you afford to put at risk? You'll find business-opportunity package prices that range from less than $100 to more than $10,000. Listen up: All business-opportunity packages are, without exception, high-risk investments. You have to be ready to lose your entire investment. Can you afford to lose $2,500--or whatever amount the package costs? Don't kid yourself that this can't happen to you. As easy and profitable as the program seems during the sales presentation, you may find it's not that easy to make money, for whatever reason. So go in with your eyes wide open, and, whatever you do, don't bet the rent money.

Law and Order

Twenty-six states and the FTC regulate the offer and sale of business opportunities. That regulation varies widely among these authorities--as does the definition of what constitutes a regulated business opportunity. In its 1979 Franchise Rule, the FTC adopted a narrow definition that actually excludes many business-opportunity ventures from coverage. The FTC staff is now in the process of rewriting the definition from the ground up. Variations among the state laws make it difficult to predict what will be required of any particular company in a given state. It's even difficult to generalize about the scope of business-opportunity regulation.

But we'll generalize anyway. When you boil down the laws, a business opportunity is generally defined as any set of goods or services offered by a seller (for more than $500 or as little as $100, depending on the state) that enables the purchaser to begin or maintain a business, in which the seller makes one of several specified representations about the package investment. Obviously, it's an extremely broad definition.

What does this usually mean in terms of legal compliance? Under the FTC Franchise Rule, the business-opportunity seller must deliver a full-disclosure document at least 10 business days before the purchase. Under most of the state business-opportunity laws, a regulated seller must register its offering with the appropriate agency. The seller must also provide each prospective buyer with a copy of the registered disclosure document a specified number of days prior to the buyer paying money or signing a binding contract.

Does this mean you'll receive one of these disclosure documents before you purchase a business-opportunity package? In some instances, you certainly will; in many others, you'll receive nothing in the way of disclosure. Some companies legitimately feel they are not required to provide disclosure; for instance, if their packages sell for $400 in a state that sets the definition at a $500 minimum investment. Others simply ignore the registration and disclosure requirements, banking on lax enforcement by state and federal agencies.

Protect Yourself

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

• The full name and principal business address of the seller, andthe name of the president of the company. Ask for a copy of anannual report or another set of financial information that showsthe seller's financial stability.

• Records showing whether the company or any of its executiveshave been named in any state enforcement actions for violation offranchise or securities law or other serious legal problems

• All fees you must pay to the seller or its affiliatedcompanies

• Your total investment or the range of your total investment. Ifthe program requires a computer or other equipment at your homeoffice and the use of any particular software, find out in advanceso you can fold in the expense.

• Any supply arrangements or restrictions that may apply. If theseller offers an initial supply of product, find out exactly whenthat inventory will be scheduled for delivery.

• A copy of any contract or agreement you must sign to acquirethe program, so you can review it before you actually buy thepackage

• A detailed description, in writing, of any territory rights youexpect to receive

• Any information the seller has detailing the sales experienceof other owners. This is a sensitive question in thebusiness-opportunity arena, and sellers will be cagey aboutanswering it. Most business-opportunity laws prohibit a seller fromdelivering performance information to prospective buyers withoutproviding it--carefully footnoted and explained--in the disclosuredocument.

• Information about existing owners. Seek statistics (how manyowners there are in your state, region and town) as well as thenames, 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 berepresentative, or they may be earning a commission by helping theseller make sales.

Evaluating the Opportunity

The biggest problem you'll encounter in evaluating abusiness-opportunity package is lack of information andunfamiliarity with the business context, and many sellers will dotheir best to exploit your disadvantage. For instance, imagineyou'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 onan automatic breath analysis. The seller's rep makes it soundlike a straightforward business: You place them in virtually anybar, and every week you collect money and replenish the blowstraws. What could be easier?

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

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

If the business opportunity relies on a distinctive retailproduct line, like greeting cards or specialty snack foodspresented in grocery stores on wire racks, you should evaluate thereliability of the product supply and whether the wholesale pricesare comparable to those of competitive products in the market.Again, this is a challenge that comes with inexperience and beingunfamiliar with the business context. If you had experience in thegrocery store business, you would know what questions to ask andhow to evaluate the wholesale prices.

Take your time in evaluating the offer. Despite what any salesrepresentative tells you, there is no hurry. If the rep tells youhe's only selling three packages in your town, the first twohave been snapped up, and you had better make a decision quicklybecause he's leaving town at 5 p.m., you should give the rep aknowing smile and tell him you appreciate his closing technique.Don't allow yourself to be pressured, and don't put downsubstantial money on an impulse or after listening to an excitingpresentation.

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

Protect Your Money

One reason business-opportunity investments are high risk isthat you pay a substantial sum of money upfront for theseller's promises of future delivery of equipment or inventory.With your money in the seller's pocket, you may have norealistic recourse if the seller disappears on you, the shipment isdelayed or lost, or the contents disappoint you for some reason.Consider negotiating a payment structure that protects yourposition.

Yes, just about every aspect of the transaction is negotiable.What if you offered to pay one-third upfront and the balance upondelivery? Try even paying nothing upfront. Treat the price quotedas the seller's opening offer, and counteroffer with a lowerprice bid. Not everyone is comfortable negotiating, but let this beyour first introduction to real business dealings. What have yougot to lose?

Check Out the Seller

You can certainly check with your state agencies to see if theseller is registered to offer business-opportunity packages in yourstate. The 26 states requiring registration or filing are Alabama,Alaska, California, Connecticut, Florida, Georgia, Illinois,Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan,Minnesota, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma,South Carolina, South Dakota, Texas, Utah, Virginia and Washington.The state agencies will readily tell you if a particular company isregistered in the state. They can also provide general informationregarding business-opportunity investments.

You should also check in with the Better Business Bureau and inquire about anyconsumer complaints that might be on file for the company. Also,visit the company's headquarters. This is a perfect opportunityto get all your questions answered, to look the president in theeye and to size up the home office team. Don't be too swayed byswank appearances at the offices or the sincerity of the seniormanagement. Almost everything at the office can be rented, and, asmy favorite college professor taught me, sincerity is one of themore cosmetic virtues.

Don't be discouraged by the search for a solidbusiness-opportunity investment. If you take your time, makethoughtful decisions, gather the right information and protect yourmoney, you'll get past the sizzle and bring home the bacon.

Andrew A. Caffeyis a franchise attorney in the Washington, DC, area and aninternationally recognized specialist in franchise and businessopportunity law.