How to Tell if a Business Opportunity is a Scam
The Internet, radio and TV are packed with alleged business opportunities to make lots of money with very little effort. Most of these business opportunity scams seem to emphasize the work-at-home aspect of the business, together with a minimal financial investment, no special training and the ease with which someone can earn large and specific sums of money right away.
Although the Federal Trade Commission is trying to force business opportunities to disclose all necessary information, almost all regulations in place today apply only to business opportunities with an initial investment exceeding $500. However, by far the majority of the business opportunities that are promoted cost less than the $500 and fall outside any rules that the government has put in place.
Examples of scam business opportunities are:
- Stuffing envelopes
- Processing rebates
- Medical billing
- Appointment setting
- Calling prospective customers
Potential investors in these businesses should be able to detect a whiff of bad faith in these offers. Often, however, the need for a job, combined with the sincerity with which the offer is made, overwhelms the potential customer and he finds himself signing on to a “business” where failure is almost pre-ordained.
According Business Week’s article Is That Business Legitimate or a Scam?, “the average business opportunity scam runs for 12 to 18 months, ropes in 100 to 150 people, and takes a total of $3 million.”
Scam Warning Signs
Some of the signs of a scam are charging buyers up-front for materials, training and sales leads. The victim is often left with inventory that she is unable to sell. Other scams follow the classic pyramid scheme format, with the victim only able to realize revenue from bringing in other victims.
Here are some additional warning signs of a business opportunity that is really too good to be true:
- Testimonials from alleged businesspeople that have signed onto the proffered opportunity and made unbelievable sums of money in a very short time.
- Guarantees that the potential buyer will make similar amount of money with no training or minimal skills.
- Emphasis placed on the buyer’s ability to work in his pajamas, work when he wants to, or work very short hours to produce high income.
- Clearly offering the opportunity to anyone who sees or hears the promotion, without any reference to what the buyer must bring to the table.
Business Opportunity Checklist
True, not all work-at-home opportunities are scams, just as all small businesses are not destined to fail within a year of opening. Every generality invites an exception. Nonetheless, experts who keep watch over business opportunity scams strongly advise that anyone considering investing in a business opportunity consider the following:
- When an advertisement promises a certain income, it must give the number and percentage of previous buyers who attained those earnings.
- Earning claims should be given to the buyer in writing. Unfortunately, if the investment is less than $500, the seller is not legally bound to provide such documentation. Ask for it anyway.
- Ask for references – other buyers who are still with the company and are satisfied with their investment.
- Interview previous investors in person, preferably at their place of business.
- This mitigates the risk of being misled by false references and gives the potential buyer a real feel for how the business is doing.
- Check out the opportunity with the state Attorney General’s office and the Better Business Bureau, both where the business is based and where the would-be buyer resides.
- Consult with an attorney or other trusted business advisor concerning the deal before signing anything.
- Proceed with caution and care. Do your homework. And if you feel you are being subjected to high-pressure tactics, step back and re-think the investment.