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Share KUSA – It's National Small Business Week, and 9NEWS is saluting the entrepreneurs and local businesses that are essential to steering the economy out of the recession….

KUSA – It’s National Small Business Week, and 9NEWS is saluting the entrepreneurs and local businesses that are essential to steering the economy out of the recession.

On Monday, the focus was on starting your own business. The Better Business Bureau recommends taking the following steps before committing to a franchise, pyramid scheme or multilevel marketing plan.


Franchising has become one of the most popular ways for individuals to start their own businesses. However, without carefully investigating a business before you purchase it, you may make an expensive mistake.

While the majority of franchisors are legitimate, a number of them operate under false pretenses. In these cases, the victim may be subjected to fast-paced, high-pressure sales tactics and is often given fictitious sales projections, testimonials, and slick promotional brochures. He or she is urged to act immediately to take advantage of a “ground floor” opportunity. When the sale is completed and money collected, a number of incidents may happen: the scam artist may disappear with the investment; the franchisor may go out of business; products or services may turn out to be inferior, overpriced, or unmarketable; or specialized training promised by the franchisor may be insufficient. By the time victims realize they have been scammed, it’s usually too late.

  • Use caution as the best defense. Before you enter into a business arrangement, be sure you fully understand the responsibilities of all parties. Under the Federal Trade Commission rule, the seller is required to provide a detailed disclosure document at least 10 business days before you pay any money or legally commit yourself to a purchase. This information includes identifying information about the seller, background information on the business and its officers, and substantial details on how the franchise agreement works, along with restrictions on such things as geographical boundaries or conditions on the right to sell or transfer ownership.
  • Listen carefully to the sales presentation. Some sales tactics should signal caution. For example, if you are pressured to sign immediately “because prices will go up tomorrow,” or “another buyer wants this deal,” you should slow down, not accelerate, your purchase decision. A seller with a good offer does not have to use this sort of pressure.
  • If promises are made by a salesperson, be sure they’re written into the contract before you sign. If the salesperson says one thing and your contract says nothing about the promise or says something different, your contract is what counts. If the seller balks at putting verbal promises in writing, you should be alert to potential problems. You might want to look for another business.

Unless you’ve had considerable business experience, you may want to get an attorney, accountant or a business advisor to read the disclosure document and proposed contract to counsel you and help you get the best deal.

Pyramid schemes

Millions of people have found success in direct selling for companies using a multi-level compensation plan. Unfortunately, not all opportunities are legitimate and it’s easy to get caught up in the enthusiasm and big promises of a pyramid scheme posing as a trustworthy company. So how do you tell the difference? Answer the following questions:

  • Is the start-up cost reasonable? A legitimate company will generally offer a startup kit that includes product samples, catalogs, order forms and other essentials that you need to get started selling. The median cost of a kit is $99, but can range from free to several hundred dollars depending on the type of product being sold. A pyramid scheme – on the other hand – will often require a large upfront investment of several thousand dollars for which you get little more than the right to recruit others.
  • Does your compensation come from selling products and services or from recruiting others? The money-making potential in a legitimate multi-level marketing company will rely primarily on selling products – be it from your own sales or the sales made by your recruits. In a pyramid scheme money is made by the recruiter from the fees paid by new recruits, regardless of whether they sell anything. Additionally, be sure products and services are being sold to the ultimate consumer of those products instead of passing large quantities of product from seller to seller.
  • Will the company buy back sales kits and unsold inventory? Most direct selling companies do not require large inventory purchases, but if one does, be sure to check out the buyback policy. All Direct Selling Association member companies are required to repurchase, at no less than 90 percent of the purchase price, any marketable inventory and sales aids purchased in the past 12 months if you decide to quit the business. You should not risk financial loss by trying direct selling. Pyramid schemes often try to disguise their deception by offering a sham product, so beware of a company that requires a large inventory purchase with no return policy.

The bottom line is that a legitimate company will portray an honest picture of the opportunity, including the possible risks, rewards, and challenges. A pyramid-schemer, however, will enthusiastically sell you on the promise of making tons of money with little effort. Successful direct sellers treat the experience like running a small business. There are no short cuts to success. Keep a level head and evaluate all opportunities objectively. If you feel pressured to make a decision with which you are not comfortable or if the opportunity sounds too good to be true, just walk away.

Multilevel Marketing Plan

These days, who isn’t looking for a new business opportunity that promises high, sustainable profits? However, this way of thinking opens the door for fraudsters to get unsuspecting business seekers to participate in scams of all kinds. One scheme that continues to be popular is the pyramid scheme. These scams are scary and confusing to consumers because they are often disguised as Multilevel Marketing plans, or MLM’s.

  • What is a Multilevel Marketing Plan? According to the Bureau of Consumer Protection, Multilevel Marketing plans are ways to sell goods and services through other distributors. These plans promise that if you sign up as a distributor, you will receive commissions from sales you make, as well as sales of the people you have recruited as your distributors, or your “down line.”
    On the contrary, a Pyramid Scheme’s commissions are based on the number of distributors recruited, and the sales are made to these distributors, rather than consumers. There is usually a sign-up fee, and rarely is there an actual product or service. The FTC says “it is best to not get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to the people outside the plan who intend to use the products.”
  • Are you confused yet? The difference between these two plans can seem unclear, but there is one key distinction – MLM’s are legitimate, and pyramid schemes are illegal. While doing research on the particular company you are thinking about going into business with is always your best tool to protect yourself, asking yourself these key questions may make it easier to determine whether or not you are at risk for being scammed:
    1. Is the business focused more on distributor recruitment, rather than selling a product to consumers? Are profits made mainly by membership fees or bonuses as opposed to the sale of this product?
    2. Does the product you have been recruited to sell seem too good to be true, and is it priced at an expensive rate?
    3. Are there startup costs that include training materials, or are you required to invest a lot of money without receiving a valuable product?
    4. Do you feel pressured to join, and is it difficult to reach anyone when you have questions about the business?
    5. Are there promises of large profits for minimal work

If you answered “yes” to any of these questions, you are potentially at risk for being involved with a Pyramid Scheme. While a Multilevel Marketing Plan can be a legitimate and exciting new venture, the bottom line is, do your research as you consider an MLM opportunity – it could be a Pyramid in disguise.

(KUSA-TV © 2012 Multimedia Holdings Corporation)

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