Bend Over and Own Your Own Business

by Brian Dunning
April 8, 2008

Tired of the same old grind? Want to break the mold, throw away your alarm clock, tell your boss to shove it, and become independent? Are you ready for financial freedom? Get out your checkbook, because (no matter what it is) if you want it, someone is selling it. And a lot of people are buying it. Business opportunities are made, they're not bought cheaply from ads on the Internet; nevertheless, such ads are ubiquitous. And if you lack expertise in analyzing the value of such opportunities, it's easy to get ripped off.

The basic ripoff model is a simple inversion of a standard sales rep relationship. Normally, companies selling products employ salespeople or contract with independent sales reps, who are paid a percentage of whatever orders they write. You do the work, the company pays you for your time and effort. This is the model that we're all most familiar with, and it's the way legitimate business has been conducted for centuries. Somewhere along the line, someone thought up a clever way to mix things up: A way to get salespeople to continue sending in the orders, but rather than pay them to do so, have them pay for the privilege. By re-labeling a sales job as a "business opportunity", unscrupulous companies could actually make money from the very same people they would otherwise be paying a salary to, and getting the same work for it.

Here's a typical way this works. You see an ad in the paper or on the Internet promising financial freedom, owning your own business. For some fee, say $500, you can become a authorized sales agency for XYZ Company, which sells timeshare condominiums or some other product or service. In exchange for your $500, XYZ Company will provide you with qualified leads, and you are free to pursue those leads however you see fit. Call them on the phone, knock on their door, chase them down on the street and make dramatic flying dive tackles, do whatever you can do (at your own expense, of course; you are self-employed), and hopefully get some sales. You, of course, do not have any timeshare condominiums yourself, XYZ Company does; so you need to spend a portion of the money you earned from the sale to have XYZ Company provide the product to the customer. Everything works out swell for everyone. The customer got his timeshare; you earned a profit; and XYZ Company made a sale. So what's the problem?

Well, your friend Bob was applying for a job at ABC Company at the same time you were selling your old record albums to raise the $500. Bob was given a nice office at ABC Company, was freely handed the same list of leads that XYZ Company made you pay for, and he proceeded to make phone calls on ABC Company's phone bill until he made a sale. ABC Company paid him a handsome commission, deducted nothing from it, and Bob went home for the day, secure with his employee benefits package. Bob is not only $500 richer than you, he incurred no costs of his own, and ran no risk of being poor since most salespeople like Bob are paid base salaries.

But I understand why you don't want to turn green with envy. After all, you have your freedom and are self-employed! Bob is not, Bob has to answer to his boss; and that's a lifestyle you don't want no matter how nice of a BMW Bob gets on a company lease. Your friend Red feels the way you do. Red is an independent sales rep. He sells products from various companies, and earns a nice commission on every sale. He comes and goes as he pleases, and answers to no man. But when you ask Red how much he had to pay each of his companies for the business opportunity, he looks at you like you're from Neptune. Red explains "You don't pay companies to be their sales rep, they pay you."

And now you see how you've been taken advantage of. XYZ Company has sold you on becoming their sales agent, working at your own expense and at your own risk, and also managed to take $500 from you for no good reason. If you wanted to be an independent sales agent, fine; you could easily have gone and represented any of the same companies that Red sells for, and not paid them a dime.

But don't confuse these so-called "business opportunities" with proper franchises. A real franchise, like McDonald's, is all about leveraging a proven brand. You're licensing an outrageously successful brand name, and the company provides everything you need to be a real McDonald's location. The brand name and proven business model virtually guarantees success. XYZ Company, and all the thousands of no-name companies like them, offer neither a proven business model nor a valuable brand name. They merely sell "business opportunities" to supplement their lackluster product sales, if they even have any.

You're not alone, O poor sad XYZ Company sucker. There are many, many companies out there who have figured out this simple tweak. Now they make money whether they ever sell anything or not, so long as they have an endless stream of suckers paying them to work for them, for as much as $75,000 or even $100,000 to join their program. Those are pretty big numbers, more than most of us have lying around handy in the bank. Thus, you'll also find that a lot of these companies offer financing. That's right: Not only do they charge you money for the right to go out and start a business that you could just as easily do on your own without them, they also make money charging you high interest on a consumer loan. You've also seen this business model on television: A lot of companies state that gold, silver, or newly issued gold coins are valuable investments, and they will even offer you a loan to purchase them. These are simply financial service companies. Their entire business is built upon these loans, which they sell to you, and then turn around and sell the loans to a major loan servicing firm. They couldn't care less what you use the loan for, whether it's buying their worthless Cook Islands gold coins or collectible plates with a picture of Dorothy and Toto. There are exceptions — but when you see that any company offers financing on their product, it's a good bet that the financing is actually their real business model, and that the product they're selling is probably not worth much. I repeat, there are certainly exceptions, but this possibility is always worth a scan of your skeptical eye. When the product they're financing is a business opportunity, you'll find that this is the case nine times out of ten.

This discussion would not be complete without a mention of multilevel marketing, or MLM. However that subject deserves an entire episode, so I'll only mention it briefly here. MLMs are the kings of scams. You buy into an MLM by ordering say a few hundred dollars worth of product, and studies have shown that that initial purchase is all that 98% of MLM participants ever make. With this payment, you now call yourself an independent distributor, and you go forth and hope to sell those products to recoup your purchase price but also hope to sell other people to be distributors beneath you. Few people sit down to actually do the math; if even one line of distributors from one MLM program was successful in getting 5 people at each of 15 levels, this would have required the participation of more human beings than have ever existed on our planet. This is not a business opportunity; this is a cleverly marketed ruse to trick people into buying a cheap product at an outrageous price, by claiming that they're buying not just a product, but also an "opportunity". More on that subject in a future episode.

If you're considering any business opportunity, the first rule is to ignore the marketing claims presented with it and examine the deal with skepticism. If someone's trying to sell you something, that means (by definition) that the money is going into their pocket, not yours. Make sure that the value is genuine. People who want your services should be willing to pay you. If they're asking you to pay them, you have very good reason to be skeptical.

By Brian Dunning
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