updated 12/25/2005 7:14:59 AM ET 2005-12-25T12:14:59

While the scams can be difficult to detect, Dan Salsburg, an attorney for the FTC, says there are tell-tale signs of fraud that a savvy consumer can learn to spot:

Thinking of investing in a business opportunity? Know your rights
It’s critical for consumers interested in buying a business opportunity to know their rights. The FTC’s Franchise Rule requires most business opportunity promoters to provide certain kinds of information. Promoters of business opportunities that sell $500 or more to provide prospective buyers with certain information.

Says Salsburg: “Consumers should know to look for the information. If it’s not there, the opportunity isn’t worth pursuing.”

If the promoter claims — even in an ad — that buyers can make a certain amount of money, the number and percentage of previous purchasers who achieved that level of earnings must be included.

Promoters also must provide a franchise disclosure document that includes basic information about the promoter’s company, including whether it has faced any lawsuits from purchasers or lawsuits alleging fraud. In addition, the promoter must give potential purchasers the names, addresses and phone numbers of at least 10 previous purchasers who live closest to the potential buyer.

Even if the business opportunity sells for less than $500 and is not required to provide this information, Salsburg advises consumers to get it anyway — in writing.

Tips from the FTC

If you’re interested in pursuing a business opportunity, the FTC advises you to:

  • Look at the ad. If it includes an earnings claim - but not the number and percentage of people who achieved it - the business opportunity seller is probably violating the law.
  • Search the franchise disclosure document for a statement about previous purchasers. If the document says there haven’t been any previous purchasers but the seller offers a list of references, be skeptical: the references probably are phonies.
  • Get the list of 10 previous purchasers and interview each in person, preferably where their business operates. This can help reduce the chances of being misled by phony references.
  • Don’t yield to pressure. Salsburg says that “Promoters of fraudulent business opportunities often use high-pressure sales tactics to get you to buy in. But if the business opportunity is legitimate, it’ll be around when you’re ready to decide.”
  • Call around. If the business opportunity involves selling products from a well-known company, call the legal department of the company whose merchandise you would be selling. Find out whether the promoter is affiliated with the company, and ask whether the company has ever threatened trademark action against this promoter or others.
  • Consult with professionals. Talk to an attorney, accountant or other business advisor before you sign any papers or pay any money. If the promoter requires a deposit, ask your attorney to establish an escrow account until you close the deal.
  • Contact the attorney general’s office, state or county consumer protection agency and Better Business Bureau, both where the business opportunity promoter is based and where you live, to find out whether there is any record of unresolved complaints. While a complaint record may indicate questionable business practices, a lack of complaints doesn’t necessarily mean that the promoter and the business opportunity don’t have problems. Unscrupulous dealers will change names and locations to hide a history of complaints.

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