Business Opportunity Scams: How to Avoid Them
If you’ve been feeling the pinch caused by our “new economy,” then you may be a sitting duck for business opportunity scam artists. At least that’s what the Federal Trade Commission (FTC) said in a press release issued this week. They announced an intensified crackdown campaign against a variety of scams tied to the down economy.
The FTC stated that there have been 120 law enforcement actions so far this year against those promoting dubious “opportunities.” The Commission alleged that a handful of widely publicized get-rich-quick schemes have already swindled over $300 million from unsuspecting consumers.
Why now?
In hard economic times, fraudulent businesses boom. The scammers know that when the money gets tight, emotions run high, and irrational decisions are more likely. That’s because distress caused by financial pain makes it easier to believe big promises of recession-proof income made quickly with minimal work.
We want to believe.
Warning Signs
According to the FTC, fraud is most often associated with investing in vending machines, display racks, pay phones, medical billing, work-at-home, and Internet-related business opportunities. Beware of promises to make lots of easy money in a short period of time with little effort or skill.
Another earmark of fraudulent operations is their high pressure tactics, often including telemarketing as part of the sales process. The aim is to make you feel like you will lose out if you don’t fork over your money immediately.
If you’re unsure, don’t let them pressure you with scarcity before you’ve gathered all the information you need to be comfortable with your choice. Listen to your gut. Use what I call strategic procrastination. If it is a truly viable business opportunity, it will still be there AFTER you’ve had all your questions answered. Otherwise, let it go. It probably wasn’t a good fit for you anyway.
You should also pay attention to specific claims about how much money you “can” make. The FTC Franchise Rule says if the seller is making earnings claims, they must provide proof for those claims. This includes the number and percentage of previous buyers who achieved at least the earnings promised.
If the cost of the program is $500 or more, they must back up their earnings claims in a written document. Otherwise, they are violating the law.
Are there testimonials? Be sure these are legitimate. Ask for contact information. The FTC requires business opportunity promoters to give you the names, addresses and phone numbers of at least 10 previous buyers who live the closest to you.
Personally interview these people, doing so in person if at all possible. It’s best if you can see their business operations with your own eyes. This dramatically reduces the chance of being misled by phony references. Don’t skip this step if the program calls for a substantial investment.
Does that mean all business opportunities are scams?
Sadly, these fraudulent business promotions make it harder to recognize legitimate businesses. They’ve mastered the same highly effective marketing tactics used by credible, successful companies.
So if a business, for example, is making a time-sensitive offer, or its program is limited in some way, it doesn’t necessarily mean it’s a scam. There are plenty of legitimate companies who offer valuable information for short time periods or on a limited basis for valid reasons.
But when they are making big promises with a big ticket price, you need to be careful and take the time you need to decide if it is the right decision for you. Whether it is a scam or not will usually become evident with due diligence.
Do your homework
First be clear on your own goals and objectives, and don’t make your decision based solely on emotion. Making smart choices means doing your homework.
Whenever starting any kind of business or going into a new market, you need to do your own investigation into whether there truly is an existing demand for the type of product or service you’ll be selling. That’s always true, regardless of whether you are considering the purchase of a business opportunity or not.
Be especially wary of those who claim you do not need to put much time or effort into the business to get big rewards. You may reasonably be able to achieve those kinds of results in the long run, but starting a business always involves risks and substantial work on your part in the beginning.
If you are required to sign a contract, consider discussing it with your lawyer and accountant first, especially if a sizable amount of money is involved.
It may also be wise to get information about the company from the Attorney General’s office, consumer protection agencies and Better Business Bureau. Just remember that a lack of complaints doesn’t necessarily mean that the business opp is a good one.
What if you’ve already been scammed?
If you’ve already bought into an “opportunity” that didn’t live up to its claims, and you’ve tried to get your money back without success, you may have been scammed.
But all hope is not lost, yet. You can take your case to the authorities.
Where to report fraudulent business opp promotions:
- The state Attorney General’s office in the state where you live and in the state where the business opportunity promoter is based.
- Your county or state consumer protection agency. Check the blue pages of the phone book under county and state government.
- The Better Business Bureau in your area and the area where the promoter is based.
- The FTC. File a complaint online at www.ftc.gov or call toll-free 1-877-FTC-HELP (1-877-382-4357).
It is definitely possible to start or grow your business successfully in any economy. But to make smart choices, especially when scammers are rampant, you need to pay attention to the warning signals and do your homework before opening your wallet too quickly.
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Gabrielle Fontaine, PB is a freelance Professional Bookkeeper and Advanced Certified QuickBooks ProAdvisor. She specializes in assisting Internet-savvy entrepreneurs get control of their books and maximize profits. Gabrielle also publishes the business-boosting online ezine, Smart Money Choices. Get more information at http://www.BookkeepingDirect.com
July 17th, 2009 at 5:39 pm
Excellent article, Gabrielle!
I’d just like to add to what you said, Gabrielle, that one of the things to avoid in starting a business is thinking that a business idea that worked for somebody else will automatically work for you. Very few people ever get somebody else’s business idea to work profitably for them.
And when you start a business based on an idea or a subject area that you know little about, you double your learning curve — and your chance of business failure.
Not only do you need to learn the basics of running a business and make the crucial adjustment in mindset from employee to entrepreneur, but you also need to learn the ins and outs of a subject area and target market that you may know little about.
I always encourage new business owners to build their business around something they know and enjoy. It cuts their learning curve in half and gives them a business that they’re far more likely to enjoy running.
Unfortunately, many new business owners don’t see where their experience and interests can translate into profitable businesses. So they turn to the scammers with their promises of no-effort success.
There are a number of exercises a prospective business owner can do to identify the profitable business ideas lurking in their own background. But I’d better cut this comment off before it ends up being longer than the original article. LOL
The point is, look for ways to build a business around knowledge, experience, and passion that you already have, and you will have far less temptation to fall for the false promises of the scammers.