CONSUMER ALERT 

MIKE COX
ATTORNEY GENERAL

The Attorney General provides Consumer Alerts to inform the public of unfair, misleading, or deceptive business practices, and to provide information and guidance on other issues of concern.

BUSINESS OPPORTUNITIES

Are you looking in the classified advertisement section for a business opportunity? Have you received an invitation to a local seminar? Often you can recognize business opportunity offerings by these common first line advertisements:

Own Your Own Business
Vending Route for Sale
Pay Phone Route
Be Your Own Boss
Make $1,200 Per Week
Have a Computer? Work at Home

These ads often also appear in the retail and sports section of the newspaper. The investments can be risky. Keep in mind that just because an ad appears in a reputable newspaper or magazine does not mean that the information it contains is accurate or legitimate. Consumers often lose their life savings when they respond to these ads and invest in the business opportunity offered.

COMMON PROBLEMS

Consumers who invest in business opportunities, especially those involving vending routes, may experience many problems. Once the investment is made, you may not receive the machines from the vending distributor as promised, or you may find yourself with faulty, poor quality vending machines that are easily broken into and poorly located. Investors often have trouble with the "locators" who, for a fee, are supposed to help the investor place the vending machines, pay phones, ATM machines, Internet-access kiosks, etc. in profitable locations. Some machines may even be placed at a business without its authorization and are often removed without the investor being notified.

Investors in business opportunities are often misled to believe that the business is highly profitable when, in fact, profits are seldom realized. Also, investors often find that the business opportunity promoter is unresponsive to complaints and may even go out of business before problems are resolved.

WHAT THE LAW SAYS

Both federal and state laws specifically address the offer and sale of business opportunities. Twenty-three states have business opportunity laws. The Federal Trade Commission (FTC) compiles contact information for these states in their document entitled "State Offices Administering Business Opportunity Disclosure Laws"  (http://www.ftc.gov/bcp/franchise/netbusop.htm).  Michigan only requires the seller of a business opportunity to file a notice with the Attorney General on or before the first sale date if the purchaser pays a total of more than $500 from anytime before the date of sale to anytime within six months after the date of sale.  Most states require the seller to give potential purchasers a pre-sale disclosure document that has first been filed with a designated state agency. The fact that an entity has filed a business opportunity notice with the Michigan Attorney General or any other agency in another state does not imply approval of the business opportunity or any of the activities of representatives selling such business opportunities.

On the federal level, the FTC has a rule on franchise and business opportunity ventures (16 CFR 436.1) that requires the preparation of a disclosure document for prospective purchasers. If the business opportunity costs $500 or more, the federal rule requires that a promoter who claims – even in an ad – that buyers can make a certain amount of money, also include the number and percentage of previous purchasers who achieved that level of earnings. If the opportunity involves an investment of under $500, ask the promoter to put the earnings information in writing. Even if the business is not legally required to provide a disclosure document, you still should obtain one for your own information.

Under the Michigan Consumer Protection Act, a business opportunity exists where a third party (the seller) offers to sell or lease to you (or actually sells or leases to you) products, equipment, supplies, or services to enable you to start your own business and the seller also makes one or more of the following representations (see MCL 445.902 for more details):

1. seller will provide or assist in getting locations for product to be sold on premises not owned or leased by either the purchaser or the seller;
    

2. seller can purchase some or all of the product created by the purchaser using in whole or part supplies sold to the purchaser;
    

3. seller makes an income guarantee or promises a refund or repurchase of product if the purchaser is not satisfied;
    

4. seller will provide a sales or marketing program enabling the purchaser to earn income greater than the money paid for the opportunity.
   
    

DO YOUR HOMEWORK

There are several sources of assistance in researching a business opportunity. When checking with different agencies for complaints, remember that while complaints may alert you to problems, the absence of complaints does not necessarily mean the company is legitimate. Unscrupulous companies may settle complaints, change their names, or move to avoid detection. Remember that many seminar "trainers" and "consultants" are really there to sell you a business, not to teach you. Your homework before you spend time going to an "opportunity meeting" or a "seminar" for a business opportunity should include:

1. Checking with the Michigan Attorney General's office (1-877-765-8388) and the Attorney General's office in the state in which the company is located for complaints filed against the company offering the business opportunity.
2. Checking with the Better Business Bureau where the promoter is based and where you live to find out if there is any record of unresolved complaints.
3. Research at your local public library, including Internet research. If you are not Internet savvy, ask the librarian for assistance and consider running the company name and principal owners through a few different search engines, also reference consumer protection Web sites.
4. Checking with the National Fraud Information Center (1-800-876-7060).

BUSINESS OPPORTUNITY CHECKLIST

Before you buy, make sure you obtain and thoroughly read the business opportunity disclosure document and contract. Although Michigan does not require a disclosure document, the items in this checklist are required elements in the disclosure documents many states require. Consult with an attorney or accountant, preferably one with experience in this area, before you pay any money or sign any document. Although an accountant or attorney will charge a fee to review the disclosure, they can save you thousands of dollars. Even the most experienced entrepreneurs – who perhaps can afford to lose more than you – never enter into an important business relationship without consulting a team of professional advisers. There is no reason why you should not do the same. Pay particular attention to the following items.

• Description of the Business Opportunity
  What specific products and services will the seller provide to you? Is the product of high quality? Get information about the manufacturer of the devices and research this company independently of the business opportunity. Is there a market for the product? Ask for market studies to answer this question. Request information on the seller's marketing plan. Will national advertising be provided? Will there be any restrictions placed on your operations (i.e., what and where you must buy and sell).
• Prior Business Experience of the Seller and Its Partners, Officers, Directors, and Affiliates
  How long has the seller conducted a business of the type you will be operating? Has the seller or its principals or affiliates had any prior business experience in related areas? Which ones? Does the salesperson know the business firsthand? If you are getting the hard sell about how great a particular business is, ask, "Why don't you do it yourself?" Find out how long your sales reps have been with the company they are representing.
• Seller's Prior Business Opportunity Track Record
  How many of these business opportunities have been operating in your area within the preceding calendar year? The FTC requires business opportunity promoters to give potential purchasers the names, addresses, and phone numbers of at least 10 previous purchasers who live the closest to the potential purchaser. Make sure the company gives you a complete list of business opportunity owners. Do not accept a list of references chosen by the company. Keep a sharp eye open for shills or phony references. Talk to other buyers in person about their experience with the company. Visit their sites to check out their equipment and locations. Are their equipment and locations comparable to what you will receive?
• Earnings Claims and Projections
  How many purchasers over the past three years achieved earnings in the amount or range specified by the seller? What are the bases and assumptions underlying sales and earnings projections?
• What Will Be Your Total Outlay?
  How much will you have to pay in initial fees, deposits, and down payments? Will you have to make any payments to someone other than the seller? What for? Will you have any recurring expenses to run the business, such as royalty payments, rent, advertising fees, training fees, and any additional equipment or inventory expenses?
• History of the Seller and Its Partners, Officers, Directors, Sales Representatives, and Affiliates
  Find out who the principals are of the company, the president and all officers, and tenaciously research their backgrounds. Do they operate other similar companies under different names? What is the record of the other companies? Have they ever offered another business opportunity, and if so, why aren't they still offering it? Are these individuals involved in legal difficulties?
• Insolvency or Bankruptcy of the Seller and Its Partners, Officers, Directors, and Affiliates
  The disclosure document should also tell you if the seller or any of its partners, officers, directors, or affiliates have filed for bankruptcy, been adjudged bankrupt, or have been reorganized due to insolvency.
• Financial Statements
  Carefully examine the financial statements in the disclosure document. An accountant or lawyer can help you analyze them and tell you about the seller's financial strengths and weaknesses. If the seller is in a weak financial position, it may be selling business opportunities as a way to raise cash just to stay afloat and won't be able to provide you with effective support. Current financial statements will also tell you if the seller is really a one-person operation or if the seller will be able to refund your money if there is a problem.
• Business Opportunity Contract
  Under what conditions could you terminate or modify the contract? Is renewal automatic? Does the agreement have any covenants not to compete? Get all promises in writing as part of the contract, including training programs, site selection, financial assistance, what right (if any) you have to cancel, refund policies, restrictions on your service area, and the policy of buying back unused equipment or supplies. If something is not part of the written contract, don't believe it!

 WARNING SIGNS

• Pressure to sign immediately "because prices will go up tomorrow," or "another buyer wants this deal."
• A requirement that you pay a fee before getting detailed information about the business opportunity or the people selling it.
• High earnings claims for little or no work. Ask for support of the earnings claims, including the percentage of purchasers who have actually achieved the results the company claims are possible.
• Evasive answers by the salespeople or unwillingness to provide requested disclosures.

Legitimate business opportunity sellers will want you to ask many questions regarding your chances of success with their service or product. They will not be offended if you ask questions or ask to talk to previous buyers.

Be realistic. If the offer was such a great deal with high profits, wouldn't everyone be interested?

WHERE TO COMPLAIN

If you think you've been defrauded, contact the company and ask for your money back. Let the company know that you plan to notify officials about your experience. Keep a record of your conversations and correspondence. If you send documents to the company, make sure you send copies, not originals. Send correspondence by certified mail, return receipt requested, to document what the company received.

If you cannot resolve the dispute with the company, several organizations may be able to help you.

1. Michigan Attorney General
   Consumer Protection Division
   PO Box 30213
   Lansing, MI 48909
   1-877-765-8388
   www.michigan.gov/ag (online complaint available)

If the company is not in Michigan, file a complaint with the state office who administers the business opportunity laws in that state.  State Offices Administering Business Opportunity Disclosure Laws.

2. The Better Business Bureau where the company is located.
3. The US Postal Inspection Service investigates fraudulent mail practices. USPIS Mail Fraud Complaint Form.
4. The advertising manager for the publication where you found the advertisement (publications often choose to discontinue fraudulent advertising of which they become aware).
5. Federal Trade Commission
   Division of Marketing Practices
   Washington DC 20550
   1-877-382-4357
   www.ftc.gov (online complaint available)

Remember, if a business opportunity sounds too good to be true, it probably is.