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The Honolulu Advertiser
Posted on: Saturday, March 1, 2008

Starting a business? Don't get ripped off

By Michelle Singletary

The constant drumbeat of bad economic news may lead to an increase in small business start-ups.

As people struggle to pay for higher mortgage costs, rising energy and gasoline bills, and climbing prices at the supermarket, many will be enticed by small-business opportunities.

But in your quest to become an entrepreneur, don't get suckered into a deal that will just make someone else money. Be careful about falling for a bogus business scam. And just as important, scrutinize legitimate prepackaged small-business opportunities that sound good but often don't deliver the promised income.

Small-business opportunity scams and businesses in a box, as I call them, have grown in part because of the decline of traditional job security and the large number of people who have lost their jobs, the Federal Trade Commission reports.

"We find that typically business opportunity victims want to work hard to supplement their income ... but what they don't do is go and see the business opportunity in action," says Lisa Hone, assistant director of the FTC's Bureau of Consumer Protection.

DON'T PILE UP DEBTS

People see these entrepreneur opportunities as a way to prosperity. However, to fund the operations, they often take out home equity loans, deplete their savings or raid college or retirement funds. If they aren't careful, their entrepreneurial endeavor could put them further in debt, said LaShawn Johnson, a staff attorney in the FTC's Bureau of Consumer Protection.

Johnson said she interviewed one couple who got involved in a fake coffee business. To fund the enterprise, they raided their 401(k) plan and used other savings. They lost $30,000 and ended up getting a divorce.

"To be an entrepreneur you have to have some enthusiasm, but you have to partner that with a certain amount of realism," said Molly Brogan, vice president of public affairs at the National Small Business Association.

Before signing up for a business opportunity, check out www.business.gov/guides/franchises. The Web site is managed by the U.S. Small Business Administration in partnership with 21 other federal agencies. Also go to www.ftc.gov, where you will find lots of cautionary information about bogus and legitimate small business opportunities.

CHECK IT OUT

Johnson of the FTC suggested that before you invest a penny in a business, get all the information about earnings potential in writing. If the business opportunity costs $500 or more, the promoter has to back up the earnings claim in a written document.

The promoter has to include evidence to verify earning projections, including the number and percentage of recent clients who have earned at least as much as what is being promoted. If the cost of the prepackaged business is less than $500, you should still get everything in writing.

The FTC also recommends that you interview current owners in the business. And for goodness sake, do the interviews in person at the place where the business is operated. It will be easier to spot fake testimonies that way.

Hard economic times or recessions do present an opportunity for people without work or who are in need of cash to pursue their dream of becoming their own boss. But don't let desperation or your excitement about a slick business opportunity presentation get in the way of doing some homework.

Reach Michelle Singletary at singletarym@washpost.com.