Subscribe to Entrepreneur for $5

If It's So Good, Why Offer it to Me?

5 ways to tell legitimate deals from stinkers.

Opinions expressed by Entrepreneur contributors are their own.

I went from being a gang member and slaughterhouse worker to becoming a billionaire. What opportunity made me a billion bucks? The debt-collection business. Talk about an area with a bad reputation. My company took a different path and earned the praise of Working Woman Magazine for being one of the Top 100 Best Companies for Working Mothers. We broke the mold, redefined an industry and made lots of money at the same time.

Reflecting on my successes and scars, here are five principles for how you can identify truly good opportunities of your own and quickly dump the rest:

  1. It should be just good enough to be true.
    When someone pitches you on an opportunity and there's only good news as far as your eye can see--that's bad news. Engineers have a saying: "You can have any two of the following--fast, cheap or good--but not all three." That's as true with bakeries as it is with bridges.

    Strive to work with partners who recognize that everything has tradeoffs and who are up-front about them. It's often still possible to profit, as long as you see the negatives and act accordingly.
  2. Barriers are your friend.
    When an opportunity seems to say: "Welcome, come on in!" that's no real opportunity.

    Look for conventional-wisdom barriers. Often that "wisdom" is not wise at all. Try to find powerful statements everyone seems to accept but which lack any factual basis. In my case, the reputation of debt collectors was somewhere below politicians and scam artists. I saw that big "Keep Out" sign as less competition and more profit.
  3. Talk to actual users.
    If the new opportunity is a product, use it yourself to decide whether you're impressed as a consumer. If it relates to oil rigs, talk with a drilling crew. You simply must get input from actual users to determine how great this opportunity may realistically be.

    I had been poor for so much of my life that I knew exactly what the typical bill collector was like. I treated customers with dignity and respect. They reciprocated by paying my bill before they paid others.
  4. Question their motives.
    I know . . . your mother told you all about the Golden Rule. I'm not your mother. Remember the title of this article--why are they offering the deal to you? Let's put aside the baloney answers you'll hear--answers such as, "Because I want to give back." That's nice. Now why are you really showing me the deal? Other responses:

    I already have eight deals like this and I see more good ones than I can finance.
    That may be legitimate, as long as the person can back it up with proof.

    We've had overwhelming requests by people to participate in this new opportunity, so we finally caved in.
    Usually hogwash. Translation: "We don't want to risk our own money on this new venture, so we're looking to use your dough to prove our concept."

    It's not part of our core business so we're selling it off .
    That can be a very good reason, if the seller can back it up with proof. It could mean the company has decided to stick to its knitting.
  5. Look for the time horizon.
    Business opportunities have a half-life, just like uranium. Blogs and video sites are "in" right now. If your business relies on popular trends, it pays to watch for signs of user fatigue and what may be next.

    When I was buying defaulted loans in the '90s, I knew the opportunity would not last forever. Sure enough, it was profitable for a few years and then dwindled.

    The government bailout changed all that. I now see an even bigger opportunity for buying defaulted loans and making an absolute fortune from them. Still, the biggest window is only for another couple of years until the next major election. Politicians will want this "toxic asset" problem solved before voters go to the polls.

    Just as I am looking at a two-year opportunity, you should know what the horizon is for your business.

Entrepreneur Editors' Picks