February 2014: SCAMwatch is warning people thinking about buying a franchise or small business to beware of exciting new franchise opportunities that may actually be scams.
Franchising scams can come in the form of a pyramid scheme dressed up as a reputable franchise. These scams may appear to be slick and professional, with a sophisticated website, marketing material and buzz-words. The scammers may also promote the franchise as a golden opportunity for investors to join a 'proven' business that requires minimum effort, experience or skill with instant rewards.
A legitimate franchisor will provide a prospective franchisee with a disclosure document 14 days before entering into an agreement or handing over any money (as is required by law under the Franchising Code of Conduct). This document should contain important information about the franchise, including the payments to be made, the contact details of existing and former franchisees, and inform franchisees of their cooling off rights.
The tell-tale sign of a pyramid selling scheme is that they recruit people rather than selling a legitimate product or service. In a recent example of such a business opportunity it is difficult to identify the true nature of the business and pin-point what is actually being bought or sold.
In the end all pyramid schemes collapse, leaving participants with empty pockets and potentially in hot water too as these schemes are illegal in Australia.
If you are interested in joining a franchise, make sure you know what you're getting into – pyramid selling schemes are often highly sophisticated and hard to tell apart from genuine offers. If you sign up to a fake franchise, you will lose your money.
How these scams work
- You come across a franchise system or small business opportunity advertised online. You may come across the website directly or alternatively through an online selling platform.
- The website appears to be the real deal, with a slick and professional design. It may contain information that appears plausible for a genuine business site such as a business model, mission statement, industry statistics, diagrams, support services for franchisees such as mentoring and training programs, and free marketing tools. It may also use buzz-words such as 'risk-free', 'not-to-be-missed', 'high return', 'unique' and 'innovative' to entice you to join.
- Despite all the information provided, if you actually look for what the franchise is selling, it is hard to put your finger on exactly what is being bought or sold.
- In order to participate, you have to pay significant upfront costs to join the franchise.
- Once you sign up, you will be required to recruit other 'franchisees' or 'franchise partners' to join the scheme. You find that you will not only never get the returns that were promised, but you will also have to continue to approach and sign people up.
- If you sign up prospective franchisees, including family and friends, you will not only be involving them in the scheme, but also breaking the law.
- In the end, all pyramid schemes collapse and you will lose your money.
- Seek full information – ensure that you receive a disclosure document from the business before handing over any money. If you are not provided with such a document, walk away.
- Make sure the business you are dealing with is the real deal – ask around, search online and contact existing and former franchisees. Don't just rely on information from the business but seek out independent sources to verify the information. If you have any doubts, don't sign up.
- Understand what you are purchasing – ask yourself, what is the service being sold? Do not enter into an agreement if you do not know what is being offered.
- Do not succumb to high-pressure or buy-it-now sales tactics – take your time to understand what you are agreeing to.
- Minimum effort does not reap maximum rewards – there are no get-rich-quick schemes and the only people who make money are the scammers.
- If you believe that an offer is a pyramid scheme, do not take part – it is very likely that you will lose your money and you could be breaking the law. Participating in a pyramid selling scheme is illegal in Australia.
- Remember – these days, it's easy for a scammer to create a professional looking website and use marketing jargon.
Information about what to look for when choosing a franchise and what should be contained in a disclosure document is available in the ACCC's franchisee manual.
You can report scams to the ACCC via the report a scam page on SCAMwatch or by calling 1300 795 995.
For more information on how these scams work, check out the pyramid schemes section on SCAMwatch.
For more information about your rights and obligations as a franchisee see the ACCC's online franchising information.
If you are interested in buying into a franchise, check out the ACCC-Griffith University free online pre-entry program, which will give you invaluable advice about what you need to know before signing up to any offer, and what you need to ask. Genuine franchise systems will be able to answer these questions; most scammers will not.
To find out more about your rights and obligations as a small business under Australia's competition and consumer laws, contact the ACCC Small Business Helpline on 1300 302 021.
Stay one step ahead of scammers, follow @SCAMwatch_gov on Twitter or visit http://twitter.com/SCAMwatch_gov.
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