Reality check - buying business opportunities - Cover Story

Entrepreneur, July, 1996 by Andrew A. Caffey

WHO WOULDN'T be interested? For an investment small enough to fit on most credit cards, you can buy a (part time!) job that will kick out $60,000 a year! Where do I sign? To get the full story, let's take a look at two entrepreneurs who answered this ad.

Entrepreneur One calls and learns the opportunity is a rack distribution program for a new line of chocolate bonbons. "Six-figure incomes are common," the sales-person says, "and you will spend no more than two and a half hours a week on this business. You'll buy all product from the company, and location advisors will work with you to place the racks in the best spots in town."

"Even if I lose the entire $1,000," the entrepreneur rationalizes, "I can afford it." After buying the initial inventory, though, he's into it for $5,000, and it starts to look a bit more intimidating.

Six months later, broken display racks line his garage, bonbons are melting in his basement, and what product he has placed in stores is not moving. Let's put it this way: He's a long way from that six-figure income.

This ad also catches the eye of Entrepreneur Two. The difference is that this business opportunity buyer does her homework.

She looks into the product carefully, taking the time to talk to retail store owners in her town about displaying the line (they are not enthusiastic). She checks with the Better Business Bureau and finds out the seller has an unacceptably high number of complaints on file; what's more, three states have taken legal action for trade violations.

So she moves on with her search and finds a stronger business opportunity company with a more attractive product line and a lot less hype in its sales presentation. She visits company headquarters, meets senior management and walks through the manufacturing facility. Retailers show far more interest in this product. She contacts three current distributors who report fairly good success, long hours and strong market acceptance of the products.

Six months later, she's not making a six-figure income--but then, our second buyer was not led to expect pie-in-the-sky results. The business is providing a solid secondary income, one that could allow our savvy buyer to leave her job in a year and pursue the business opportunity full time.

* FIRST THINGS FIRST

The experiences of Entrepreneur One and Entrepreneur Two take place every day in the United States, as hundreds of new entrepreneurs try their wings with entry-level business opportunities. What makes the experiences of Buyer One and Buyer Two so different? Homework, that's what.

Finding the right business opportunity for you will ultimately depend on your good judgment, your business sense, thorough research and street smarts. And as with most things in life worth doing, there are no shortcuts.

Let's take a look at the only way to research a business opportunity investment--one step at a time.

1. Be aware that business opportunities are inherently risky investments. Understand going into it that any business opportunity investment will put your funds at risk. It's just the nature of the beast. Any success you experience will be entirely due to your own drive and ingenuity in using the tools the business opportunity program provides. Of course, you can--and should--take steps to reduce the risks as much as possible (many are noted in "Check It Out" below), but as with any opportunity, do not invest money you are not prepared to lose.

2. Understand the purchase decision is driven by information you don't have. A business opportunity buyer is at an immediate disadvantage. The information you need to make an informed investment is entirely in the hands of the seller, and the seller is selecting the sizzling information he is using to sell you the program.

Take another look at the mock advertisement at the beginning of this article. Of the information selected by the seller, you have learned the earnings potential of the business and the initial investment (part of the story at least), and the advertisement confirms your frustrations with your working life. The seller alone knows the real story of this alluring investment. Your task in this transaction is to level the playing field by digging for the right information.

For many--but not all--business opportunities, the Federal Trade Commission (FTC) requires a disclosure document be given to potential buyers. This document will spell out some of the basic information about the company making the offering.

But even if you are not given a federal disclosure document, 25 states regulate business opportunity sales in various ways. Most of them impose their own disclosure and registration standards. Recently, Illinois adopted a business opportunity law that became effective on January 1. It requires sellers to register with state authorities and provide buyers with complete disclosure at least 10 business days before the sale.

3. Find a business opportunity that will meet your needs. One size does not fit all. Your childhood friend may be entirely comfortable selling lingerie through an exclusive distributorship, while you may want to concentrate on sports equipment. The first step in any business opportunity investment is to examine your needs, dreams, strengths, weaknesses and financial resources. Concentrate on fields that draw on your interests, such as hobbies, crafts, activities and the like.