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Don't be fooled by a fake franchise

Written on the 27 February 2014

ACCC Scam Watch

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.

Read more on source website.

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