Business Opportunities

A business opportunity involves the sale of goods or services that enable the novice entrepreneur to start a business. Typical business opportunities involve vending machines, amusement games, pay telephones, and display racks for such items as greeting cards and CD-ROM computer software. Ideally, the vending machines or display racks are located in high-traffic areas, such as malls, airports, or bowling alleys.

The promoter of a business opportunity may be responsible for providing vending machines or display racks and finding locations for investors. The promoter may offer to locate the machines for investors, may assist the investor in locating the machines, or may refer the investor to a professional locating service. The promoter may also represent that it will repair or replace broken machines. The promoter may also supply marketing plans, training, or other general guidance. Generally, the operator of the business opportunity is responsible for cleaning and restocking the machines or display racks, making sure needed repairs get done, and collecting the money.

Tips for Consumers

Proceed With Extreme Caution

If you detect signs of a problem in a business opportunity that you are reviewing, you should proceed with extreme caution. If you have concerns about how you are faring with an existing business opportunity and believe that some of these hallmarks are at work in your deal, it may be time for you to complain to a regulator. Unfortunately, the nature of business opportunity fraud is that it may take six or more months for an operator to recognize that he or she has been duped. The problems may drag on because of stalling tactics on the part of promoters who promise to make repairs or partial refunds. The best way to avoid being taken by a business opportunity scam to begin with is to research any potential investment thoroughly with an eye to signs of possible trouble. Anyone who is considering an investment in a business opportunity should review the following key pieces of advice:

Be Skeptical About Earnings Claims

Be skeptical about earnings claims that sound too good to be true. The "bait" on the "hook" of a business opportunity scam is that the person with no experience may be able to work only a few hours a week and earn $50,000, $100,000 . . . or more a year. The truth is that making money almost always requires hard work . . . and lots of it.

Exercise Caution When it Comes to Ads

Exercise caution when it comes to newspaper and magazine ads that contain little more than glowing promises and an "800" number. This is very likely a "come-on" pitch to lure you into calling a high-pressure telemarketing boiler room operation! Keep in mind that just because an ad appears in a reputable newspaper or magazine does not mean that the information it contains is accurate or legitimate. As in recent sweepstakes and travel scams, the phone con artists pushing bogus business opportunities will make any statement necessary to separate an unwary individual from his or her savings.

Review Disclosure Document

Obtain and review the required disclosure documents before money changes hands. Keep in mind that business opportunity and franchise promoters are required to present you with a disclosure document before you sign a contract or pay a fee. If this document is not made readily available, beware! When you get the document, carefully review the portions dealing with: risks; the business experience of the company and directors; history of lawsuits, including those alleging fraud; fees to be paid and conditions under which fees and deposits will be returned; audited financial statements containing balance sheets for the three previous years; and substantiation for any earnings claims made to you.

Check Compliance with State Laws

Make sure that the business opportunity has complied with applicable state registration laws. Even if a business opportunity promoter complies with the laws in your state governing such deals, there is no guarantee that you will make money. However, it is one easy way to screen out bogus operators who are trying to "fly below radar" in order to evade detection by regulators.

Talk to current investors . . . and watch out for "singers."

You should always take the time to speak with several people who are current investors in the business opportunity that you are considering. The disclosure document must contain a list of the business opportunities' current operators. But be on your guard! A scheming promoter of a bogus business opportunity may line up "singers" who provide phony testimonials.

Be suspicious if you cannot reach references by phone.

In one case investigated by the FTC, a promoter used three aliases and out-of-state voice mail boxes to return calls in which he posed as an investor to woo prospects. The best way to avoid "singers" is to get the names and addresses of the retail locations where the vending machines or rack display are purportedly located and visit the locations in person. You can then judge for yourself the quality of the machines, their state of repair, and the traffic volume of the location.

Interview at least five references.

You may wish to ask them the following questions:
  • Are you happy with your investment?
  • Has the promoter come through for you?
  • Are you making the money you thought you'd be making?
  • Would you make this investment again, knowing what you now know?
  • What do you like and dislike about this business opportunity?
  • What are the names and addresses of the retail locations where your machines are currently located?

Research the business and the market.

Make sure that you have a clear grasp of how the business opportunity will work and what demand (if any) there is likely to be in your territory. Don't rely on glowing promises from telemarketers who claim that consumers are clamoring to get your product. In one case where a business opportunity claimed to have a "worst case" net return of $1,220 a month, investigators found that the investor who was doing the best only made about $200-$300 monthly.

Get professional advice if you need it.

Don't lose your life savings just because you failed to spend a few hundred dollars to talk to a lawyer, an accountant or other expert. These people will sometimes be able to spot key details that you are missing. Since they are not caught up in your dream and hope for success, outsiders are sometimes in a better position to review a business opportunity from a neutral vantage point.

Don't automatically assume that promises of prime sites, speedy repairs, and ongoing assistance will be there when you need them.

Remember that a bogus business opportunity promoter will promise you the sun and the moon in order to get your money. Be cautious when you sign up with a firm that is supposed to identify prime sites for your vending machines, pay telephones, display racks, or other items. Keep in mind that many who get burned in business opportunities lose their money when promoters fail to come through with promised repairs and other ongoing assistance.

Adapted from: The Florida Attorney General's Office