by Reed Richardson.
As the economy has struggled over the past few years, one notable side effect from the recession has been a renewed interest in entrepreneurship. But as the number of Americans launching their own ventures has grown, so too has the number of those falling victim to work-at-home business opportunity scams. For budding entrepreneurs looking to break out of the corporate rut full-time or even those just seeking to supplement their regular income, these supposedly lucrative, low-risk, high-reward offers often prove hard to resist. Certainly, there are work-from-home jobs and small business enterprises that are on the up-and-up, but distinguishing these legitimate investments from the fraudulent ones isn’t always so easy. So here are some key warning indicators and due diligence recommendations to help prevent your entrepreneurial dreams from turning into a financial nightmare.
1. If it sounds too good to be true…it is!
Eileen Harrington, Deputy Director of the Federal Trade Commission’s Bureau of Consumer Protection notes that the telltale signs of business opportunity fraud boil down to three main elements: “You can earn a lot of money,” “I will show you how to do it,” and “You can count on being successful.” (For more tips on researching business opportunities, watch the FTC video on avoiding job scams, located in the sidebar.)
Of course, rare is the small business that skyrocketed to profitability performing easy, uncomplicated tasks that require no previous experience. So, if a business opportunity promises big returns or guarantees results but seems to involve little more than executing simple, mundane tasks like stuffing envelopes, processing rebates, or performing online searches, you would be well advised to proceed with caution. These can’t-miss pitches usually bury important details in the fine print and often involve using unsuspecting entrepreneurs as shills to rope more people into a pyramid-like scheme, one in which the business is only sustained by bringing in multiple levels of ever-increasing numbers of investors.
For example, a recent envelope stuffing scam, successfully prosecuted as fraudulent by the Federal Trade Commission, promised to pay $10 plus postage for every envelope mailed, resulting in potential income ranging from $550 to $3,000 a week. “Consumers paid a fee of $65 to $160 upfront for a package of supplies from the defendants after being promised ‘BIG PAYCHECKS Within TWO WEEKS . . . If you Act NOW!’” according to the FTC judgment. “While consumers did receive the envelope-stuffing materials, they soon discovered they were simply sending out more solicitations for the defendants’ purported business opportunities. None made the money the defendants promised and none were reimbursed for postage either.”
2. Treat as suspicious any solicitations to pay anything before seeing or starting the business opportunity
“If someone wants you to make an advance payment to ‘get in’ on the ground floor of a new business opportunity—especially if it’s a big investment, or you don’t have much information about the deal—this is a big red flag,” notes this Better Business Bureau article on work-at-home scam warning signs. “Don’t do it. ‘Advance fee scams’ are very common and they come in many varieties.”
This is even true if a business opportunity guarantees full refunds or claims it will send you all their prospectus materials for free, but still wants to charge your credit card a small fee for shipping and handling or processing. If you’re dealing with someone unscrupulous, giving them your credit card number and allowing them to process one transaction, even for just a few dollars, can unlock the door to many other charges, which you may have unwittingly agreed to by clicking on a link on their website or checking “I agree” next to a set of their terms and conditions. And often, that same fine print includes complicated, onerous provisions—commonly called “negative option proposals” or “continuity plans”—that make canceling these ongoing and unwanted charges all but impossible. (Click on this recent FTC report to read more on how a negative option scam works.)
Conversely, some ultimately fraudulent business opportunities can appear completely legitimate because, rather than give their product or service away for next to nothing, they instead require large upfront investments, whether it’s to buy specialized equipment and software or to stock up on initial product inventory. “Often these are the most persuasive kinds of scams. It seems like it might be a real business opportunity—but it’s not,” the Better Business Bureau points out. “Here’s what happens: the buyer makes the purchase and never receives the things needed to set up the business. You can avoid this situation! Check the business out completely before you send a dime.”
3. Research every potential business enterprise thoroughly
Because a preponderance of work-at-home business opportunities begin through contact online or via phone, it is imperative that a budding entrepreneur look beyond what is being said or written to find out what is or isn’t real. A good place to start is the Better Business Bureau and state consumer protection agency. There, you can check the business’s rating and find out if there are any past or pending complaints from other clients. No rating, a poor rating, or even an ongoing lawsuit doesn’t mean a business is fraudulent of course, but a legitimate enterprise with such a track record should be able—and willing—to provide potential investors a reasonable and detailed explanation.
Don’t be fooled by glowing references to the business on apparent news sites or the use of large, corporate brand names like Google in the sales pitch either. The former are often phony and the latter are often completely unrelated to the business opportunity. (In fact, Google’s name has become so popular with work-at-home scammers that in late 2009 the company filed a lawsuit to stop what it said were attempts by fraudsters to deceive people into thinking they actually would be working for Google.)
In addition, it’s imperative that you acquire from any potential business opportunity a full set of written disclosure documents, which should include data supporting any earnings claims as well as a list of every purchaser of the business venture. By law, the FTC also mandates that, upon request, a business must provide potential investors with the names and contact information, including both the phone number and physical address, of at least 10 other investors. So, don’t be satisfied if you’re only provided a handful of contacts, which consist solely of a name and phone number.
Why? Because those few, unseen contacts may very well be in on any scam and therefore primed to exploit your budding interest by feeding you reassuring claims of their experiences. If at all possible, arrange to meet any references in person and ask them for documentation that backs up any individual claims of sales revenue or profitability. If the business can’t provide you with any references that live close enough to personally visit, ask them to explain why. And if a reference can’t back up his or her claims of success with some semblance of proof, this should be another warning sign.
4. Fast No’s and Slow Yes’s
As former work-at-home scammer Jim Vitale tells it, the process of luring someone into parting with their money involves carefully manipulating their enthusiasm (or desperation) to get them to follow a series of seemingly small steps that inevitably lead up to the large decision of buying in. The best counterpunch to that slippery slope, he advises, is an attitude of fast no’s and slow yes’s. In other words, approach any work-at-home business opportunity with a skeptical attitude, one that prevents this momentum from building up and errs on the side of caution and inactivity. Don’t be persuaded into doing something you’re unsure of or uncomfortable with simply because someone warns that the opportunity is a limited offer or only good while supplies last.
Likewise, if detailed questions about the business’s inner workings and demands to see its disclosure documents are ignored, glossed over, or met with a suddenly hostile attitude, it’s wise to step back and reassess the venture. “If [a telemarketer] is dealing with somebody who is asking questions about the legitimacy of the business, at that point, you do a slap takeaway,” Vitale recalls. This high-pressure sales tactic, where the business representative threatens to scuttle any further talks and dismisses the potential investor as not serious, is simply a disingenuous move designed to restart the sales process and encourage someone to take more risks to prove their real interest.
“People want to believe that there is some opportunity that they can invest in that will guarantee that they will have financial success,” notes the FTC’s Harrington. But that willingness of budding entrepreneurs to step out into the unknown must be tempered with a strongly critical, common-sense approach when it comes to buying a work-at-home business opportunity. Or, as Harrington emphasizes, potential small business owners must continually remind themselves: “There just is no sure deal. None.”
FTC's guidelines to evaluating a business opportunity
1. Insist on seeing a written copy of the company's disclosure document, which includes:
- Information about the company
- List of previous purchasers of the business
- Lawsuits pending against the company
2. Get information in writing about earnings claims
3. Interview references and previous buyers of the opportunity in person
4. Resist any urge to buy a business over the phone
If you feel you’ve encountered a fraudulent work-at-home business opportunity, report it by calling 877-FTC-HELP or going online to www.ftc.gov/complaints.