March 18, 2003

COLLEGE STATION – When it comes to business opportunities, not all plans are created equal. And the budding self-employed entrepreneur needs to be able to recognize when a business opportunity is a real one – and when it's not.

"Throughout the United States, many people are starting legitimate home-based businesses every day," said Dr. Pam Brown, Texas Cooperative Extension consumer sciences specialist. "Because of this growing interest in home-based businesses, a large number of individuals and companies have organized to meet the needs of these budding entrepreneurs.

"Some of these companies, however, are more interested in selling a worthless business idea and padding their own pockets instead of helping someone develop a real small business opportunity."

The Better Business Bureau provided a list of "red flags" for the prospective self-employed to use in determining what is an opportunity and what is a scam. According to the BBB, questionable work-at-home opportunities include those which:

- Are said to bring in a lot of money with very little effort: "You can earn hundreds of dollars working from home in your spare time."

- Don't require any experience: "Succeed without any special training. "

- Utilize a market that already exists: "This huge, untapped market is waiting for YOU!!!"

- Require a small amount of money for training material and supplies: "For only $29.95 you can have thousands of $$$ in earning power!!"

- Don't bring in a salary, but do bring in lot of profit: "Profits will start rolling in with your first completion."

- Must be acted upon now: "Don't wait! This offer won't last long..."

Federal Trade Commission investigations show many of these scams are promoted at trade shows, through classified advertisements in newspapers and magazines, through telemarketing and over the Internet. Brown listed some of the more common scams being offered as "business opportunities":

- Assembly or craft work: Sometimes requiring a large investment in both funds and time, these schemes involve the entrepreneur producing goods for the company, which, in turn, has agreed to buy the completed goods when they are completed. What most often happens, Brown said, is the company refuses to buy the completed goods because they don't meet "quality standards."

"Unfortunately, no work is ever ‘up to standard'," she said, "leaving workers with relatively expensive equipment and supplies, and no income. To sell their goods, these workers must find their own customers."

- Envelop stuffing or other mailing scheme: This old con starts with ads which promise a lot of money paid for envelop-stuffing done in spare time, Brown said. Just a "small fee" is required to get started. But, according to the FTC, what usually happens is, instead of getting paid for stuffing envelopes, budding entrepreneurs get a letter telling them how to place the same kind of "envelop-stuffing" ad in newspapers and magazines, and collect money from other victims.

"Dollar amounts in this type of operation are low, but profits to the unscrupulous promoter are high," Brown said.

- Internet-related business opportunities: Usually promoted on Web sites or e-mail, these ads promise a lot but deliver a little, Brown said. "Keep in mind that just because a company has a flashy Web site doesn't mean it is legitimate. These scams often target people who are eager to learn and use technology but are not yet Internet savvy." Some of these schemes are illegal pyramiding, selling machines or kiosks that provide walk-up access to the Internet, and fake training programs for "Internet consultants," she said.

- Medical billing scams: Advertised as pre-packaged businesses, these scams sound believable, Brown said. For a small fee – which might be as much as $8,000 – the company promises to set up home computers for "everything you will need to earn $50,000 or more" processing medical billing, insurance claims and managing medical and dental offices.

"According to the FTC, few consumers purchasing a medical billing business opportunity are able to find clients, start a business and generate income," Brown said. "Competition in the medical billing market is very strong among a number of large and well-established firms."

- Multilevel and pyramid marketing: Multilevel marketing involves "selling goods and services through distributors," Brown explained. "However, if the program offers to pay commissions for recruiting new distributors – watch out. Most states outlaw this practice, which is called ‘pyramiding'."

In pyramid schemes, the major focus is signing up more distributors, not selling goods and services, she said, and the pay scale is based on how many new distributors each recruiter signs up. "The major problem with this type of scheme is that to make large amounts of money, the distributor needs to be at the top of the pyramid," Brown said. "Pyramid programs that pay commissions for recruiting new distributors eventually collapse when no new distributors can be recruited. And when the program collapses, most people lose their money."

Watch for this kind of scheme in e-mail chain letters, she warned. Already-established businesses – whether home-based or not – can fall victim to frauds and scams, Brown said. To lessen your business's chances being hurt by one of these scams, the National Consumers League recommends:

- Doing business with known and trusted businesses;

- Understanding what is offered before agreeing to it;

- Checking bills and invoices carefully;

- Guarding financial and other information;

- Avoiding scams through education.

Some scams to avoid:

- Seminars selling home-based opportunities: The FTC advises to watch out for companies – especially if they are from out of state – that sell opportunities such as resale of merchandise, vending machines, T-shirts, discount travel, vitamins, scholarship searches and estate planning.

- Franchises: Some companies promoting franchises are less than on the up-and-up, Brown said. If a franchise is offered, "the company must provide a disclosure document before anyone signs an agreement or invests any money," she said. "A legitimate franchise opportunity will provide a prospective entrepreneur with all the required information up front, as well as the opportunity to validate the information. Schemes and scams will not do this."

- Vending machines and display racks: Some of these businesses are legitimate and some are not, Brown said. The legitimate companies will provide the support and training they promise; the scam companies do not. The FTC requires that "buyers are entitled to written disclosures from business opportunity sellers of vending machines and display racks," she said. These disclosures include names of at least 10 prior purchasers in the area, as well as information on their sales, income and profit, and how these figures have been calculated.

"If a vending machine or display rack opportunity seller does not make these disclosures, it is violating federal law."

- Wealth-building schemes: If the company's way to getting rich quick is to sell books, tapes or software on how to get rich quick, run the other direction, Brown advised.

Her other advice:

- For information on specific companies or opportunities, check with such agencies as the Attorney General, Secretary of State, BBB and consumer protection agencies in the state where the business is headquartered.

- Don't judge by appearances.

- Ask for disclosure statements.

- Ask for a list of previous investors or business owners.

- Ask for company claims, promises and policies, as well as information on sales, profit and income – in writing.

- Consult an attorney, accountant or business advisor.

And remember: If it looks "too good to be true," it probably is.

For more information visit:

- Federal Trade Commission: http://www.ftc.gov

- United States Postal Service: http://www.usps.gov

- National Consumers League: http://www.natlconsumersleague.org

- Better Business Bureau: http://www.bbb.org

For more information contact a county agent or call Brown at (806) 746-6101 or by e-mail atp-brown@tamu.edu. More information is also available at http://fcs.tamu.edu/