Legitimate business opportunity or scam?

Richard Holden, Head of Franchising at Lloyds Banking Group, comments on how budding entrepreneurs can avoid business scams and invest in a business opportunity with potential.

The economic recovery is creating new jobs across the UK, and the Government is reporting a gradual fall in unemployment. Despite this, wage increases are for many still lagging behind inflation, and figures show more people are now choosing to be their own boss and start up a new business.

Many budding entrepreneurs up and down the country are looking to achieve their dreams by turning their new business ideas into money making opportunities, generating numerous business opportunities for aspiring owners to buy into.

But how can you spot a legitimate business opportunity from a scam? Unfortunately, many websites and classified ads promote what amount to business scams alongside genuine business and franchise opportunities. This makes it tricky for the investor to simply identify a true opportunity, with an epidemic of scams looking to take advantage of the aspirations of would-be entrepreneurs.

It is not always easy to spot a scam, so to minimise the risk of falling prey to these rogue traders it is essential to undertake thorough research before embarking on any new business opportunity.

There is truth in the old saying ‘if it seems too good to be true, it probably is’. Below are some of the most frequent, rarely proven, claims which should be treated with caution:

  • Huge profits, no competition, low level investment!
  • Work no more than 20 hours per week and earn £50k + per year!
  • Run your own business, no experience needed, money back guaranteed!
  • Earn great profits, do it all from home with total flexibility!
  • No fees, absolute best products available anywhere!
  • The ability to earn a substantial income working from home!

These promised returns rarely materialise and investors can get stuck holding worthless stock they are unable to sell. The fact is that there are no shortcuts to wealth – the only people likely to make money in these situations are the fraudsters.

Aspiring business owners need to apply lots of common sense when researching potential business opportunities. A good place to start your search is with fully proven franchise brands that are based on years of experience and a tried and tested business model. There is a reason why established franchises are successful – franchising is the duplication of a proven business model with initial training and ongoing support delivered by the franchisor.

In addition to a track record of success, a well-established franchise can also provide the investor with a known brand name, national account contracts and better supplier terms. The advantage of training and support should not be overlooked by budding investors. Having someone that can share their years of experience running a similar business and stop you from making costly mistakes is a real and significant benefit for franchise owners.

Compare this to the scam option, which often involves the investor parting with significant cash up front for little more than some stock and a manual which gives them limited instruction. To help would-be business owners navigate what is often a tricky path in the early days of researching new opportunities, these handy guidelines below may help:

Advice for new business investment

  • If it looks too good to be true, it probably is
  • Beware of promises of guaranteed or very large returns
  • Look out for being sold goods or services with little or doubtful value
  • Beware of offers to teach you ‘secret’ or ‘exclusive’ techniques for building wealth
  • Avoid advertisers who state ‘this is not a pyramid scheme’ or ‘this is totally legal’
  • Never be pressured into making decisions about the investment
  • Always investigate schemes carefully before you agree to invest
  • Avoid fad industries that won’t be around in a few year’s time
  • Ensure that you actually visit the Head Office business premises before you commit
  • Always speak to existing investors and thoroughly check all testimonials and references
  • Seek independent legal, financial or other professional advice before parting with any money

Whether you are looking at a stand alone business opportunity or joining a proven franchise brand, any investment requires thorough research and careful evaluation before you make your commitment.

One essential piece of research is to speak to as many existing franchisees or investors as possible. It is likely that a franchisor will want to manage that process, so its franchisee network is not bombarded with enquiries from potential investors. But don’t let them cherry pick who you speak to. Try to speak to a selection of franchisees, including some of the best and worst performers to help you determine what is required to make the opportunity work.

You may also wish to speak to someone who has recently established their business – they will have just gone through the same process as you so their experience will be invaluable. It is also worth speaking to franchisees who are more established and who have moved past the start-up stage. They will be able to point out some of the pitfalls to avoid and where you can expect your own business to be in a few years time.

Of course, franchising is not right for everyone. For people who value independence or want to run a business without restrictions or to reinvent the wheel, franchising might not be the right choice for them. Franchising is not an easy business option and investors need to go in with their eyes wide open. Ultimately if you have done your research, considered all the alternatives, taken the right professional guidance and decided that franchising is the best way forward for you then there is every opportunity to benefit from your chosen franchise for many years to come.