DOB: Understanding Business Opportunity Investments - Warning Signs

Understanding Business Opportunity
WARNING SIGNS {Alarm bell ringing out a Warning}

Be on the lookout for these signals that something may be wrong.

High Pressure Sales:

Does the seller badger you with constant phone calls or e-mails – or demand that you make a quick decision?  Do you feel forced to pay on the spot, whether via credit card, overnight courier service or otherwise?

Sellers with good offers don’t have to use sales pressure. Give yourself enough time to investigate the business opportunity.  Talk to an attorney or accountant if necessary.

The High Profit Promise:

Beware of claims that you’ll achieve high profits – especially if the profits are “guaranteed.”  Ask the seller to verify the income projections and profit claims in writing.  The seller should give you specific figures on how many purchasers actually earned such profits.

Just because you see a profit claim on the Internet or in a print advertisement doesn’t mean that it’s valid.  Newspapers, radio and television stations don’t have the time and resources to carefully screen and verify every advertisement they run.  In addition, there are no controls over what a seller can publish on its own web page.  If you hear promises of high profits at a trade show, seminar or during an "infomercial," be a critical listener and treat the claims with skepticism.

If you’re dealing with a multi-level marketing company, ask the seller to give you specific figures on how many people have actually reached the most advanced status levels.  It’s not uncommon for the vast majority of distributors to be concentrated at the bottom of the status ladder.

The No Risk Promise:

Watch out for remarks like "you can't go wrong" or "this is a ground floor opportunity."  Understand that small start-up businesses are riskier than more established ones, and that different types of businesses involve different risks.

High Start-up Fees:

Are you getting your money's worth in terms of the inventory, training and other services you will receive?  Sales jobs, for example, shouldn’t involve very high start-up fees.  In addition, if you will be selling a product, will you be able to retail the product at a profit given your costs?

Avoid multi-level marketing arrangements with high sign-up fees, substantial inventory quotas and no product repurchase policy. Most important, if a multi-level marketing company makes you buy a lot of products just to join (front end loading), think very carefully about signing up.

Missing Disclosure Document or Evasive Answers:

If the seller fails or refuses to provide you with a disclosure document, don’t buy the business opportunity.  In addition, if the seller will not give you straight answers on the business opportunity arrangement, it may not be in your best interests to invest.

The “Red Carpet” Seller:

You've never met the seller, but he sure sounded smooth when you called his international toll-free number.  How nice of him to take time out from his busy schedule to fly in and quickly sign you up – at the airport’s premier motel lounge.  Don't let flashy appearances fool you. This “Red Carpet Seller” will leave your wallet in the red.  Unless you're dealing with a highly reputable out-of-state company, if there's trouble down the road, it will be a lot easier to collect from a Connecticut based seller.

Glowing References and Testimonials:

The seller’s website and promotional materials feature countless references – all glowing.  Many of the people are halfway across the United States or perhaps in another country. Should you care?  Absolutely. The seller could be paying these folks to give you a rosy picture, or they could be the seller’s close friends.  In one extreme case, the seller’s staffers manned an answering service and posed as delighted purchasers when new investors tried to question them on whether the business opportunity was profitable.

Even if the references the seller gives you are genuine, they may be too new at the business to say for sure what lies ahead. Your best bet is to meet the purchaser in person and carefully look at first year costs and break even sales computations. Stop by the purchaser's place of business and examine for yourself the volume and type of business that is being conducted.

Skimpy or One-Sided Contracts:

Business opportunity and franchise relationships seldom involve a complete balance of bargaining power. Many agreements are lengthy, comprehensive documents that cover almost every aspect of the relationship. Others involve nothing more than a boilerplate purchase order or one page form with fine print on the back. If your contract takes only a couple of minutes to read or looks incomplete, and the seller makes promises not covered by the agreement, watch out. Your success depends on the seller honoring its part of the bargain.  If the contract doesn’t spell out what goods or services the seller will supply, you will have a hard time if there is a dispute. Regardless of whether your contract is skimpy or comprehensive, read it carefully to make sure it's not drafted entirely in the seller's favor. Take the contract to an attorney before you buy so he or she can make sure your rights are protected.

Suspect Affiliations:

The seller's name isn't a household word, but according to the seller’s website and glossy brochure, you could start a business stocking racks with brand name merchandise.  There is even a picture of the product’s trademark and logo.  A good deal, right? Not necessarily. The seller may not be legally authorized to use the trademarks and logos. If a third party (such as a trademark holder) is an important part of the business opportunity's operations, check to make sure that it really does have a role in the business and that it is legitimate.

Irregular Business Practices:

Does the seller require you to leave Connecticut to sign up for the business opportunity and make payment? If so, the seller may be trying to escape the jurisdictional reach of Connecticut's business opportunity laws and avoid having to give you a full disclosure.  Does the seller require that you make your check payable to "cash"?  This may be an attempt to prevent you from tracing where your money went if a problem develops later on.  At any sign of irregular business practices, put away your checkbook or credit card and head for the nearest exit.

Pyramid Scheme Warning Signs:

Be wary if the start-up cost for the investment is high.  Will the seller buy back inventory?  If not, the sale of inventory may only be a smokescreen for the true nature of the business.  Is there a consumer market for the product?  If the seller seems to be making its money from recruiting alone, stay away.

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