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:
- Many fraudulent promoters use the classified sections of newspapers and magazines to advertise the so-called opportunities.
- Many offers show up as spam email or in Internet ads.
- The ads typically involve vending machines for candy, soda, snacks or personal care items; display racks for greeting cards, compact discs, perfume or similar items; or opportunities to buy -into medical billing or envelope stuffing businesses or activities related to the Internet.
- According to the FTC, many business opportunities offered through the classifieds or via spam email are “phantom” opportunities that have little chance of success - for example, a business with little or no demand in the market; cheap, low-quality or out-dated merchandise; poor customer service; and few, if any, locations. The locations that are offered often get little customer traffic.
- Other tip-offs to fraud include claims of high pay in a short period of time (weeks or months) for little effort (“work only hours a week”), and claims about ideal work conditions, like the ability to “set your own hours,” “be your own boss,” or “work from home.”
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.