By Toni Vranjes
A business opportunity generally involves the sale of goods or services for the purpose of starting a business. For instance, it might involve the sale of vending machines or DVD rental equipment. Or, for example, a buyer might purchase sports hats that can be sold at gas stations.
Although some business opportunities are legitimate, scams have been rampant in this industry. Sometimes, scammers mislead job seekers by depicting the business opportunity as a job, or they try to dupe people who actually want to start their own business.
To protect yourself, know the legal requirements that sellers must follow, and learn the red flags of a scam.
In response to the widespread fraud, the Federal Trade Commission has added protections for prospective buyers. The agency’s revised rule takes effect this month.
Here are the major elements of the rule:
- Streamlined disclosure. Sellers must provide a one-page document highlighting five key items: identifying information, legal actions, cancellation or refund policy, earnings claims, and references. (Sellers that make any earnings claims must provide information to support those claims.) After providing the disclosure form, the seller must wait at least seven days before asking the prospective buyer to sign a contract or make any payments.
- Broader Scope. The rule covers a wider variety of business opportunities. It applies to activities that previously weren’t subject to regulation, including envelope stuffing, craft assembly, and medical billing. The rule still covers ventures such as vending-machine and rack-display opportunities.
- Help for non-English speakers. If an opportunity is marketed in a language other than English, then the disclosure form must be in that same language.
- Prohibited Activities. The new rule prohibits a number of deceptive practices, such as making false earnings claims and using paid “shills” as references. It also forbids sellers from depicting the business opportunity as a job. Among other things, it also prohibits sellers from misrepresenting the total costs involved in buying or operating a business.
Business opportunities often are advertised on websites such as Franchise Gator, while some are still advertised in local newspapers, says Michael S. Rosenthal, an attorney at Wagner, Johnston & Rosenthal who represents sellers.
Rosenthal offers these tips for prospective buyers of business opportunities:
- Ask a lot of questions, and make no assumptions.
- Ask to speak with existing buyer/operators, and try to get as much information as you can.
- If the seller tells you that little or no work is involved, you should be suspicious.
- If you plan to invest a lot of money, buy a plane ticket or get in your car and visit the company’s home office. If the seller isn’t comfortable having you there, there’s probably something wrong.
- If you do visit the corporate office, ask yourself: Is it a real business? Is everyone involved in sales (as opposed to support functions)? If everyone you see is involved in sales only, you need to ask a lot more questions.
- If the seller promises you a specific amount of income or revenue, ask to see all of the data that backs up the promise.
- In addition to the federal rule, 26 states have business-opportunity disclosure laws. You can check with the FTC to learn about the state requirements. If you live in one of those 26 states, find out if the seller has registered with the appropriate state agency.
- Before you make a decision, consult an attorney who is experienced in this area of practice.
Toni Vranjes is editor-in-chief of Revive My Career, a resource for job seekers. The site provides employment news and career tips.