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Mystery to Me Is that a business opportunity you see or just another attempt to grab your cash and run? With a little sleuthing, you can separate the money-makers from the money-takers.

By Andrew A. Caffey

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Be Your Own Boss, Summer 2000

We Americans have an insatiable appetite for quick, easy-to-use products and services. It began with the introduction of the frozen TV dinner in the 1950s, rocketed through various freeze-dried products of the space race in the 1960s and was brought to full flower by the fast-food franchise phenomenon of the '70s and '80s. Along the way, we learned to nuke food in a microwave and crunch numbers at unbelievable speed on our desktop. Compress it, package it, reduce it to its essence, save time, don't think about it, just do it, do it all for me and don't spare the horses.

It was inevitable that our culture would produce the "business opportunity." This is a self-contained, self-executing, affordable (just put it on a credit card) no-brainer of a business concept. It has sizzle. It has instant curb appeal. It seems so simple. It has potential. It's catching a wave. It is the ground floor. It's the next McDonald's. It's the next Pet Rock, that touchstone of irrational success. It's an investment that embodies the giddiness of personal business ownership and promises the buyer an opportunity to grab hold of the elusive dream of financial success that dogs the American psyche.

What Is a Business Opportunity?

The Basic Deal

Business-opportunity packages offer a first step into business.The typical business opportunity offer runs, "For a lump-sumpurchase price, we will provide you with a package of materialsexplaining in detail how to make money operating a particular,usually simple, business. We provide instructional materials in ourpackage and sell you the the equipment/products/display devicesyou'll need to start and conduct the business. You'll goforth and sell your products/serivces under any name you choose inan active and competitive marketplace. This is a one-timetransaction, and after this we won't have a continuingrelationship with you, except possibly to sell you additionalsupplies of products/services. You will not pay us continuingroyalties."

For some people, a business-opportunity investment is anaffordable way to get their feet wet in business. However, it canalso pose problems. If the business isn't right for you, orworse, if it's not completely lefit, your investment is 100percent wasted.

Your task in evaluating a business opportunity is to determinewhether it's the right business for you, whether you can affordit and whether the business is all it's cracked up to be.Sometimes, that's not as simple as it sounds.

·Learn More:A Closer Look

Choosing the Right Biz Op For You

The Fit

How do you know if a business concept is the right one for you?There's no freeze-dried answer. It takes a measure ofself-examination. List your business and personal goals on a pieceof paper. Are you looking for part-time or seasonal work, or afull-time career change? What are your strengths and weaknesses?What do you most enjoy about your current work? Do you like talkingto customers, dealing with machines, organizing information,working on computers or working outdoors? Using the theory that noone is happier than the person who works at something he or sheloves, think hard about your passions in life.

The reason this process is so important becomes evident only onthe back end of the business-opportunity purchases. Virtually allbusiness-opportunity programs involve the buyer getting off thecouch and making sales of one sort or another (yes, it does soundlike work). The difficulty of this task is easy to play down inyour mind. "If the product/service is attractive enough,"you say to yourself, "it'll sell itself." No one whohas every been in sales would make this claim with a straight face.It simply isn't true. In fact, it takes energy, enthusiasm,drive and simple hard work to make a sale. If you aren't highlymotivated by the business concept, the product or theservice-if the business just isn't a good fit foryou-the challenges of selling will quickly defeat you.

Talk to a spouse, family member or trusted advisor about yourassessments of your strengths and weaknesses. Does he or she agreewith your perceptions? Use the people closest to you as a realitycheck-if you're way off base, the people who care aboutyou will help you refocus and be objective.

·Learn More:A Step in the RightDirection

What Will It Cost?

The Dollars

Can you afford the package? This is a toughie. Manybusiness-opportunity investments run into five digits. In the right(wrong?) frame of mind, many of us will spend untold sums asinvestment in ourselves. The reasoning goes: "I believe 1,000percent in myself and in my drive to succeed, and I will make a goof this business by the sheer force of my will." Theavailability of easy plastic credit in these situations make iteasy to vote for ourselves with money we don't have. A naturalrationalization sets in: "I'll be making big money on thisbusiness in the first month, and can easily carry and pay down thecredit-card debt."

Use this one rule to decide whether you can afford to buy abusiness opportunity: "If you can afford to lose every dollaryou invest in the business opportunity, then you can affordit." No matter how much you believe in your ownlimitless ability and fierce determination to succeed, a businessopportunity is a risky investment. Any start-up business isrisky, and the risks increase exponentially when the person at thehelm has no experience in starting and running businesses. Bydefinition, your purchase of a business opportunity is at the riskyend of the investment scale.

Let your first lesson is business be to understand and plan forits inherent risks, as weel as its potential successes. Thebusiness may well meet your goals, but there's also a chancethe business won't succeed. Be realistic in your evaluation ofthe investment costs and risks, and you'll be well ahead.

The Marketplace

Prepare for a loud and vigorous marketplace ofbusiness-opportunity ideas, programs, sales techniques andadvertising approaches. At first, it can be a bit overwhelming. Thesheer number of choices, each more interesting than the last, canthrow you. Attend a business-opportunity trade show and you'llimmediately sense the size of the task ahead of you. This is whenyour self-evaluation comes in handy. If you've thoughtcarefully about the type of business you're seeking, you cancut through a lot of the glittering distractions right away.

The range of business concepts in this marketplace is its mostimpressive feature. Just survey the concepts on display: vendingmachine routes, snack food distributorships, commercial cleaningcompanies, window blind cleaning devices, T-shirt printing presses,lotto machine routes, aspirin vending machines, travel agencies . .. the list goes on and on.

As you wander through this marketplace, be forewarned: Sellersof business opportunities are some of the most effective andaggressive salespeople in the world, and they know exactly why mostpeople are shopping for a business-opportunity package. They knowyou're probably unhappy with your current situation. You wantto tell the boss to shove that job. You want to work for yourself.You want to work at home. You want to better yourself. You want tomake more money. You want to spend more time with your family. Youdon't want to commute to work. And so the sales pitch is madeat that level. The representative will push every one of those hotbuttons in the course of presenting the business-opportunitypackage.

·Learn More:Shop Around

There's no substantiation behind the promise of big moneyfor little work. Nevertheless, you'll hear that appeal in thebusiness-opportunity maket all the time, much to the consternationof consumer protection enforcers. Big dollar signs are thrown outto get your attention. Disregard the claims and move on.

Most decisions to purchase a business opportunity are made on animpulse, and usually for all the wrong reasons. Those hot buttonswork all too well. Watch for, and disregard, rather obvious closingtechniques ("I only have 13 of these contracts to award inthis area, and nine have been assigned already. I'm leavingtonight on a 7 p.m. flight, so make your decision. Stay in thatboring job or get on this gravy train before it leaves thestation!"), and for downright elastic price points ("Ourstandard price is $5,000, but at this show we're giving themaway for $2,999!"). Take your time, and don't allowyourself to be put in a hot box. Ask questions ("What exactlydo you mean I can earn thousands of dollars working for only twohours a week?"). Make sure the purchase is right for you and,whatever you do, don't buy on an impulse.

Regulation and Enforcement

State and federal laws regulate the sale of business-opportunityventures and franchises. However, there's a big differencebetween the regulation of a franchise and a business opportunity,and you should understand what protections are in place, or not inplace, to help you.

First, a business-opportunity package is generally not regulatedas thoroughly as a business-format franchise. The principaldifference between the two concepts is the presence of a trademarklicense in a business opportunity. A true business opportunityprovides materials necessary to begin a business but prohibits theuse of any marks, images or trade names owned by the seller. Thebusiness-opportunity buyer is expected to operate under his or herown name or trademark. In a franchise system, the trademark isclearly licensed to the buyer's use. Indeed, franchise programsboast some of the best known trademarks in the world, such asMcDonald's® and Holiday Inn®.

Federal and state laws require a franchisor to deliver acomprehensive disclosure document before closing the sale of afranchise. In some business-opportunity transactions, asimilar disclosure statement is required and delivered. Why in onlysome of them? As the elastic concept of a business opportunity isharder to define than a franchise, fewer programs are reached bythe regulations, and a lower level of compliance is attained in themarketplace. The bottom line: Fewer protections are in place forbusiness-opportunity buyers than franchise buyers, so be preparedto protect yourself.

In October 1999, the FTC announced it would revise itsregulation of business-opportunity ventures, and FTC staffers havesignaled that new definitions will reach further into thebusiness-opportunity market than current FTC regulations. Althoughthe FTC and state agencies have aggressively pursued a number ofbusiness-opportunity sellers, government budgets and resources arealways limited.

If you do receive a disclosure statement prior to closing on thebusiness-opportunity purchase, it should lay out some basicinformation about the seller, the exact materials and servicesyou're receiving and information about sales in your state. Askfor a disclosure statement from your seller-if you don'treceive one, plan on doing your own basic research on thecompany.

How to Protect Yourself

Steps to ProtectYourself

How can you tell whether the business opportunity is legitimate?The best indicators are usually independent reports from satisfiedbuyers. Request a list from your seller of all buyers in your stateand adjacent states; call a number of them with a few basicquestions. Did the program work for them, and did the seller dowhat it said it would do? Have they made money on the program, andwould they recommend the purchase to a friend?

Be wary of the seller offering you only one or two names ofpeople to call. Legal cases have revealed that, in some instances,these people may be shills, paid by the seller to deliver anenthusiastic evaluation to prospective buyers.

You can check with the attorney general/consumer protectionoffice in your state to see if there are any enforcement actionspending against the company. Also call the Better Business Bureaufor a report on any complaints filed about the seller. Ifyou're a netizen, stop by the FTC's home page for the agency's tipsand traps to look out for in the business-opportunity arena.

Finally, be creative in negotiating the terms of your purchase.Put less money down until the seller can delive on some earlypromises. If the purchase price is $3,000, suggest putting down 20percent, and paying the balance over the course of the first fewmonths of operation. Using a credit card can offer some protectionsif the seller doesn't deliver on the purchase. You should checkwith your card issuer about when a "charge-back" on apurchase can be made.

Resist the lure of fast and easy money-the promise of afrozen TV dinner approach to business. Take the smart approach tobuying a business opportunity and find success on your terms, inyour own sweet time.

What About Network Marketing?

By Jane EasterBahls

While you'll see dozens of business opportunities advertisedin this magazine, some direct-sales companies you'll only learnabout by word-of-mouth. Instead of pouring money into advertising,network marketing or multilevel marketing (MLM) companies buildsales through a network of independent distributors. If you becomea distributor, your goal is to build a "downline," orgroup of people you recruit into the company, because you'llearn a percentage of every sale they make.

The products these companies sell vary widely, but most areconsumable products that customers will buy over and over. Forinstance, the oldest and largest MLM company, Amway Corp., startedin 1959 with cleaning products but now offers a range of homeproducts from food supplements and cookware to office supplies andeven furniture. Mary Kay Cosmetics Inc. sells skin-care productsand cosmetics. The Longaberger Company offers hand-woven baskets.Other MLM companies offer everything from water purifiers topre-paid legal services.

Is MLM for you? That depends on your temperament. While MLMcompanies vary widely in their structure and emphasis, all involveselling products or services to friends, family and other peopleyou know (or persuading them to start buying through the company).Being a successful distributor also involves enlisting some ofthese people in your organization. If you truly dislike either ofthese prospects, don't bother investigating further.

On the other hand, many distributors contend that recruiting isjust like recommending a favorite movie to a friend or giving yourcousin a hot stock tip. These companies offer a chance to own abusiness with flexible hours and a low initialinvestment-plus the potential for a respectable income. Ifthat idea appeals to you, you might prosper as a distributor.

Take a careful look at any MLM company you're consideringand compare it to others. The differences between MLM companies aresignificant. Here are some questions to consider:

  • Is it a legitimate company or apyramid scheme? In pyramids, each newcomer gives a bunchof money to someone higher up in the structure, then recruits acertain number of others to do the same. Eventually eachparticipant is supposed to reach the payoff level and getrich-with one catch: There are only so many suckers in theworld. In the end, as you might guess, thousands lose out. Theseschemes are illegal. Note that pyramids require a large investmentat the outset, and the product or service, if any, is incidental torecruiting. A legitimate network marketing company involves aminimal initial investment and low risk. Income is based on retailsales, not solely on how many people you recruit.
  • Do you like the product?Would you buy it if you weren't selling it?
  • Does this company emphasize sales orrecruiting? Some companies focus on enthusiasticpresentations of the product, leaving a discussion of careeropportunities to brochures and questions from interested customers.Others focus more on the money you can make by recruiting moredistributors. Some stress selling to the public, while othersstress enlisting distributors to buy products for their own use. Besure you're comfortable with the expectations.
  • Where do the sales takeplace? Selling Longaberger baskets or kitchen productsfor Pampered Chef involves getting people to host gatherings whereyou give a demonstration and offer the products for sale. Mary Kaybeauty consultants offer free facial makeovers as a way tointroduce their products. Still others use catalogs. Which one bestfits your style?
  • What's the compensationplan? Do you have to recruit a certain number of peoplebefore you can start earning more than a pittance? How do peopleget paid? At Amway and many other companies, you receive a checkfor your own income and that of those in your downline, so you haveto spend time writing checks to people under you. (If a distributorshows you an impressive check from the company, find out ifit's net income.) Mary Kay and others have each consultant ordistributor buy directly from the company.

Each company has certain levels you can reach by recruiting moredistributors, with bonuses for reaching each level. Those at thetop can make six-figure incomes. But what percentage of thedistributors reach that level? Ask for the total number ofdistributors and the company's annual revenue, and divide theformer into the latter. Due to product cost and overhead, theaverage income per distributor will be less. And if a few people atthe top are really getting rich, those at the bottom must be makingfar less than average.

  • Does the company have a track recordof at least two years? Are the managers experienced innetwork marketing? How ofter are products back-ordered? Is there aservice department to help with problems?
  • Is the company adequatelycapitalized?
  • Does the company have a good computersystem to track sales and make sure everyone getspaid?
  • Does the company refund money onunsold merchandise?
  • Would the company provideprofessional-looking sales tools?

Obviously, network marketing is not easy money. As with anybusiness, a sizable income comes from hard work, so you owe it toyourself to ask a lot of questions before getting involved.

Business Opportunity Lingo

Decoding the Hype

You may hear some outrageous statements in the course of a salespresentation for a business opportunity. Here's a quick guideto decoding the hype:

Seller Says: "I onlyhave five packages left in this area."
Translation: "I will sellas many of these programs as possible because I'm on straightcommission, but I want to create some urgency in yourmind."

Seller Says: "Ouroperators earn huge money in just a few hours of their sparetime."
Translation: "I have noidea whether you'll make one nickel with this program. Wedon't know how our buyers are doing because they don'treport their business to us."

Seller Says: "Theanswer is in the numbers, and numbers don'tlie!"
Translation: "There areonly three kinds of lies: small white lies, medium-sized lies andnumbers."

Seller Says: "Thisis a smart, affordable package."
Translation: "It fits onone or two credit cards, whether you can afford it ornot."

Seller Says: "Thisprogram usually costs $5,000, but today only, if you commit now,you can steal it for $2,999."
Translation: "We havenever actually sold this program for more than $2,999."

Seller Says:"I'm not supposed to tell you this, but our top producergrossed $150,000 last year!"
Translation: "Our topproducer last year was the owner's son, who operated threelocations and actually lost money after expenses."

Andrew A. Caffey is a practicing attorney in the Washington,D.C., area and an internationally recognized specialist infranchise and business opportunity law. You can reach him

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