© 2002 Elena Fawkner

"... ALWAYS carry out your own due diligence! Remember, if it sounds too good to be true, it probably is."

Regular readers will recognize above language. It comes from "Caveat Emptor" section which appears towards end of each issue of A Home-Based Business Online.

Good advice to be sure (even if I do say so myself). But what does "due diligence" mean and how do you do it? Basically, it means to be diligent in researching your proposed business opportunity so you can be as sure as you can be what you're getting into and why.

All very well and good, but how do you actually do it effectively?

Stock-standard advice includes:

1. Check with BBB about whether your opportunity has any complaints filed against it.

2. Do a Dun & Bradstreet search to find out about its credit history.

3. Check business references.

4. If practical, visit place of business.

Only one problem with this approach. Although it's a good start for researching a legitimate opportunity, it won't flush out a fraudulent one.

A newly formed company won't have any complaints filed against it with BBB. D&B won't be much help since scam artists will generally keep their trade creditors in good standing until immediately before they pull up stakes and vanish into night. Business references are invariably nothing but shills (associates of scammer paid for their recommendation services). And few potential purchasers living in New York are likely to travel to California just to lay eyes on so-called corporate headquarters of their opportunity. Even if they do, a serviced office gives just right professional impression.

So, how do you flush out a fraudulent business opportunity? Well, there's a hard way and there's an easy way. The hard way (which is oh so easy at time) is to fork over your money and then watch as it flies away. The easy way (which is oh so difficult at time, at least compared to just handing over your money) is to use your state's and/or FTC's disclosure laws for business opportunities (if available) and then methodically work through information available to you until you have enough information to make an intelligent decision.

There are 23 states in United States with business opportunity laws on their books. Most prohibit sales of business opportunities unless seller gives prospective purchasers disclosure documentation that has been filed with state. The 23 states are: California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia and Washington. (See http://www.ftc.gov/bcp/franchise/netbusop.htm for links to more information.)

In addition, if business opportunity falls within definition of a franchise or is a vending machine or display rack opportunity, FTC's Franchise & Business Opportunity Rule mandates detailed disclosures such as identifying information about franchisor (the person offering business opportunity), franchisor's business experience, litigation history, bankruptcy history, initial funds required, recurring funds required, financial information about franchisor and much more . A franchise is defined broadly and just because it's not referred to as a franchise doesn't mean it isn't. See http://www.ftc.gov/bcp/franchise/16cfr436.htm for full text of Rule.

The point of all of this is that many, perhaps most, opportunities you'll come across will either fall within FTC's definition of a franchise and thereby trigger federal disclosure requirements (or, if franchise offer is made in California, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Washington or Wisconsin, state franchise disclosure requirements) or, if not technically a franchise, opportunity may very well fall within scope of state business opportunity disclosure laws of 23 states listed earlier. So, when considering a particular business opportunity, take this approach:

1. Determine whether it is being offered in one of 13 states with franchise disclosure laws. If so, determine whether opportunity is a franchise as defined under state's law. If so, check whether state requires disclosure document to be filed with state. If so, check whether it has been. If not, assume opportunity's a fraud until proven otherwise. If state in question doesn't require disclosure document to be filed with state and you're not provided with such a document from company when you ask for it, assume opportunity is a fraud until proven otherwise.