Could That Business Opportunity Be a Scam?

The lure of self-employment, and economic pressures, could be driving enterprising individuals down the path to a franchise scam. A franchise is a business opportunity in which individuals pay a lump sum for a ready-made operation, often trading under a well-known name. Fast-food businesses are a typical example of a (legitimate) franchise. Most of them appear to be part of a national or international chain, like McDonalds for instance, but they're actually a locally-owned business operating under the big-name banner. 
 
There are hundreds, probably thousands, of lesser-known franchises, and while the fast food ones can cost a fortune to buy into, some of the lesser ones require a considerably smaller investment. The franchise owner buys a package of marketing materials and training and must set up a business that looks like all the others that share the name. In return, they often benefit from national advertising and other types of support, but usually have to pay a monthly percentage of their earnings to the company that created the franchise. 
 
In a franchise scam, would-be entrepreneurs pay to get into one of these businesses, only to find out either it doesn't really exist or the package they buy is not worth the money. Franchise scam artists may make untrue or unrealistic claims about the profit potential of the business or fail to disclose that the buyer has to purchase supplies from them at inflated prices. In 2011 a well-known con artist was jailed for tricking thousands of people into paying for a non-existent pet registry franchise that would supposedly help animal lovers to trace their lost pets. The scam included phony references and accounts, and claimed participants would be able to sell, for $20 apiece, a collar marking kit that would cost them only $5. Victims invested from $5,000 to $50,000 only to discover the registry, the marking kits and, in fact the whole business, did not exist. 
 
Many other franchise scams are similar to some of the phony home business opportunities, like envelope stuffing. Most of them are promoted through telemarketing calls peppered with false promises, where victims are put under pressure to make a quick decision to part with their money. The law, however, forbids them from doing this. A franchise seller must provide what's called a Disclosure Document at least 10 days before you invest. This has to include details like the names and phone numbers of other franchise owners, an audited statement covering financial performance, all of the true costs of running the business and verifiable information about the people behind the franchise program. 
 
If you're considering buying this type of business, here are some tips to avoid a franchise scam:

• If you don't get a disclosure statement, don't invest.
  
• If you do get one, read it from cover to cover -- some of them are very long -- including the small print.
  
• Contact the other franchise owners and speak to them, preferably face-to-face in their business environment so you can sense if they're telling the truth.
  
• If your investment is going to be large, seek professional advice from a lawyer or reputable financial advisor.
  
• Use the "too good to be true" rule: beware of franchises with a low entry cost with supposedly big earnings potential, or which don't have fairly rigid rules to follow. Reputable programs are normally very specific about what you have to do as an owner.
  
• Do your homework: research the franchise online. What are others saying about it?
  
• Download and read the publication Buying a Franchise: A Consumer Guide from the US Bureau of Consumer Protection.
  

Before leaving, I want to warn about another investment-related scam: so-called phantom regulators, or fake securities regulators. 
 
They set up websites and letterheads using official-sounding names that seem to imply they're official bodies handling recovery claims for investors who've previously been scammed. They then ask users for confidential financial information or even impose a fee supposedly for processing the claim, which, of course, never takes place. According to an article in the financial magazine Forbes, the North American Securities Administration Association (NASAA) recently issued a warning to one site operator, with a very official-sounding name, that appeared to be using modified NASAA content for unlawful purposes and falsely claiming to have been chartered by Congress. The site has subsequently shut down. But now before thousands of people were taken for this scam.

NASAA has produced its own list of the most common signs of a phantom regulator, including:

• Check the name of the supposed regulator with the International Organization of Securities Commissions. If it's not there, it's likely a scam.
  
• It appears to promote some kind of investment. Genuine regulators don't and can't do that.
  
• No other information about the organization can be found online.
  

You can also contact your state securities regulator to check them out.
This, and my warning about franchise scam artists, underlines the fact that, when it comes to investing and protecting your hard-earned cash, you can never let your guard down.



-Birdy