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The Sneakiest Way to Make a Fortune

Opt-out sales generate a whopping $2 billion in revenue every year. It's a totally unethical practice ... yet completely legal.

There are two key parts to any sales process: convincing the potential customer to buy what you're selling, and then getting paid. What if there was a way to eliminate both of these steps from your sales cycle? What if you could just go ahead and send something to somebody and automatically get paid for it? That’s exactly what some companies are doing, and they're making a fortune. Welcome to the world of opt-out sales.

How Opt-Out Sales Works

The opt-out sales model eliminates “sales,” because sellers deliver the product to customers without their explicit consent. Sometimes consent is obtained in an indirect way; other times, it isn’t obtained at all. The customer has the option of rejecting the sale and paying nothing, but if they don’t follow the steps to reject the sale, then it’s a done deal.

This model also eliminates collections and accounts receivable because the seller works through a billing partner. The partner is either a credit card company or a telecommunications provider with whom the customer has an existing relationship. Instead of sending an invoice to customers directly for something they didn’t explicitly want to buy, the seller informs the billing partner that they need payment, the charge is made to the customers' account and the seller is paid by the billing partner (minus a juicy processing fee).

Lawmakers Smell a Rat

If this way of doing business doesn’t pass the smell test with you, you're in good company. Congress and President Obama agree. In 2010, Obama signed into law the Restore Online Shoppers’ Confidence Act (ROSCA), which specifically prohibited certain practices related to opt-out sales. ROSCA specifically addressed the problem of “data-pass” marketing, a type of opt-out sales.

 

With data-pass, a consumer is presented with a special offer right after buying something online. This special offer usually appears as a pop-up and appears to come from the same merchant from whom they just bought something. In reality, the pop-up is from another company and may appear to offer something for free as part of the special offer. If the consumer clicks on it, that's considered “consent” for the primary merchant to pass along the consumer’s credit card information to the secondary merchant offering the deal. Usually this secondary merchant will sign the consumer up for some type of subscription that's difficult to cancel.

ROSCA no longer permits data-pass and requires that any online subscription sales clearly disclose all terms, and that the seller explicitly obtains the buyer’s consent before charging anything and provides a simple and obvious way to cancel a subscription.

It may sound like ROSCA was a far reaching law, but in reality the scope was rather narrow. Forms of data-pass marketing are still happening today and foreign merchants selling to U.S. customers aren’t covered. It also doesn’t touch opt-out sales in the non-cyber world, which is why this practice is still booming.

A Legal Scam

Mobile phone companies are currently the partner of choice for opt-out sellers. Many of the companies involved in opt-out marketing offer email processing, text-message subscriptions and other content via opt-out sales. According to the FTC, approximately 20 million consumers per year have their phone bills “crammed” with opt out sales charges, with 95 percent of them completely unaware that they are paying extra for something. This generates over $2 billion in opt-out revenues for sellers, a huge payday for services that cost nearly nothing to deliver.

 

The FTC is aware of it and the Senate Commerce Committee has held hearings, but so far there is no ROSCA-type law targeting it. Sellers typically send a text message to consumers’ mobile phones asking if they want to opt-out of their subscription service. Most people dismiss the message as spam and delete it. But by failing to opt-out, they will start being billed and paying for the subscription. For any of this to happen, though, the opt-out seller needs mobile phone numbers to target. Most people give their numbers away freely on websites or for sweepstakes and contests, not realizing that in the fine print they are “consenting” to receive marketing messages on their phone.

The opt-out sales strategy can be tempting to profit-minded business owners: Startup costs are low, there's a standard playbook you can follow and the practice is still permissible. But the "consumers" more times than not don't even know they are participants. It's unethical, even if it is legal ... for now. Would you really want to start or sustain a business using the shady practice of opt-out selling?

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What You Can Learn From a Franchise Scam VictimFranchise fraud is a rampant problem. Read how one man lost everything so you can avoid the same fate.

 

Juan came to me in a near panic, practically begging me to help him with his failing business. He was working over 90 hours per week; he was receiving excellent performance feedback from his customers; the company providing his sales leads kept sending more business his way; yet the business was broke. He had to borrow against his home just to cover basic living expenses. I sat down with Juan and began what turned out to be a year-long ordeal that didn’t have a happy ending.

Like hundreds of other victims, Juan had fallen prey to a franchising scam operating in Northern New Jersey. The franchisor targeted immigrants promising an easier and more profitable life through ownership of a commercial janitorial franchise. For tens of thousands of dollars in fees, the company promised to train franchisees, provide them with supplies and professional services and, most importantly, secure a continuous stream of clients. The franchisor also promised to handle billing and collections so the budding entrepreneurs would only need to focus on doing the work and keeping the profits. For an immigrant like Juan, who had managed to buy a home and amass a decent level of savings through hard work and frugal living, it sounded like a dream.

A Multimillion-Dollar Fraud?

I estimate that the franchisor took in over $5 million in fees from franchisees who received far less than they expected. To a trained eye, the pattern of fraud was evident, but to someone simply looking to start a business and not knowing what to look for, the signs were easy to miss. Based on the documents I reviewed and the people I spoke with, the franchisor:

  • Pressured potential franchisees to sign contracts without allowing them to read them first
  • Provided a franchising agreement that was intentionally confusing, bloated and in some parts completely nonsensical
  • Forged signatures of franchisees
  • Diverted revenues that rightfully belonged to the franchisees
  • Ran a Ponzi-like scheme with client assignments

 

Juan wasn’t making any money for several reasons:

  • The franchisor, as part of the agreement, provided liability insurance to franchisees and charged them 10 to 20 times the market premiums for the policies.
  • The franchisor, as part of the agreement, provided the franchisees with commercial cleaning contracts. The franchisor would prepare two versions of the contract—one for the commercial cleaning clients that included the true price per square foot for cleaning and a second version for the franchisee. The franchisee's version would have the fee altered, showing a price that was as low as 10 percent of the true price. The franchisor kept the difference and still billed the franchisee for the sales service. In a few cases they were so lazy, they just whited-out the price and changed it instead of preparing two versions.
  • The franchisor would tell franchisees that certain services had to be performed for free to win business when in reality they were being billed and the franchisor just pocketed the money.
  • The franchisor, which also handled billing services on behalf of the franchisees, would tell them that a particular client was very unhappy with the quality of service, had fired the franchisee and was refusing to pay the outstanding invoices. In reality the clients were happy and had paid. The franchisor just pocketed the money and would give the contract to a new franchisee to keep the fraud going.

Despite the fraudulent activity taking place, Juan and other franchisees were afraid to take action due to threats and the belief that at least some revenues coming in were better than none. The franchisor also promised them more sales contracts to make up for any “misunderstandings,” quieting them for the time being. 

Among those who thought twice about pursuing any actions against the franchisor was Juan. The franchisor could easily take away his remaining contracts and force him into bankruptcy. In the end, he didn't want to run that risk. How can something like this go on for years?

Who Protects Franchisees?

The Federal Trade Commission has, as part of its mission, the duty to oversee franchises and pursue cases of franchise fraud aggressively. There are also regulations and state attorneys general who oversee franchisors at the state level.

The Franchise Rule, which is overseen by the FTC and regulates franchisors, hasn’t been updated since 2007, and that update took over a decade to finally pass. Lobbying efforts by franchising industry associations have slowed the process down considerably. The FTC’s newly redesigned consumer website gives far less prominence to franchising. According to a search I conducted on the Bureau of Consumer Protection’s legal case listing, the FTC has yet to bring any cases against franchisors this year.

 

Some larger franchisors that have also failed to deliver as promised have very aggressive legal counsel and mandatory arbitration clauses in their contracts. They pursue complaining franchisees aggressively and make examples out of them to scare other potential complainants.  

How to Protect Yourself

It’s difficult to avoid being the target of a fraud if you don’t know the warning signs. Every franchisor must file a Uniform Franchise Offering Circular, which is a document required by the FTC disclosing important information about the franchise opportunity. Make sure that the copy you receive from the franchisor is identical to the copy submitted to the FTC. Speak with existing franchisees that have been in business at least 3 to 5 years. Make sure that these are franchisees you locate independently. Stay away from franchises where you do not control sales and billing.  Bottom line: If you suspect anything is amiss, stay away; there are plenty of worthwhile and honest franchising opportunities to choose from.

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Lessons from the 7 Biggest Sales Scams of All TimeFrom Bernie Madoff to Milli Vanilli, here are the seven biggest sales scams of all time.


We all think we’re too smart to ever be duped by a phony salesperson or fake pitch. Unfortunately, even today, we can easily still fall prey (take the Bernie Madoff scheme, for example). Small-business owners work too hard to have their money swindled away. Here are the top sales scams people actually got away with—that is, before they eventually got caught—and what we can learn from each:

1. The Brooklyn Bridge Scam
The Scammer: George C. Parker
The Victim: Wealthy New York tourists
In the early 1900s, George C. Parker "sold" the Brooklyn Bridge and other famous New York structures as often as twice a week. If you’ve heard the old line, “If you believe that, I’ve got a bridge for sale,” you know where it comes from.

Takeaway: If it's too good to be true, whether it's a consultant's rate, an investment opportunity or a new product, it probably is.

2. The Craigslist Scam
The Scammer:
 Fake telemarketers

The Victim: People selling cars
Placing an ad on a free site like Craigslist to sell your car usually results in selling your car. However, sellers may also receive calls from unlicensed telemarketers who, for a fee, offer to help sell your car. If you accept their offer, you’ll end up paying a fee of about $500 for posting to online classifieds you can post yourself at no charge.

Takeaway: Don't pay for something you can get for free. A number of free high-quality services are out there—just think of WordPress or all the Google apps available.


3. The Estate Sale Scam
The Scammer: Offshore (and some domestic) scammers
The Victim: Anyone with email
This is based on one of countless Nigerian email scams. In this scam you are told that one of your lost relative’s estates has been sold for millions of dollars. To claim your stake of $3M US, you simply need to pay $800 to release the funds. You, of course, never hear from the company or individual again, let alone receive any money.

Takeaway: It’s hard to believe anyone falls for this anymore, but it raises the question: Do you really know that person you’re emailing or tweeting with? It’s easy to create an online persona, but the only way you’ll know if people are truly who they say they are is by meeting them.

4. The Work From Home Scam 
The Scammer: Fake employers
The Victim: The unemployed
Most of these scams masquerade as ads, blogs or even news stories that talk about how easy it is to make thousands of dollars a week working from home. There’s either a “one-time cost” or a monthly fee to get materials, “insider info” or connections to companies looking for stay-at-home workers. The information is useless and your credit card will continue to be charged even after you stop your enrollment. Nightmare.

Takeaway: We all love shortcuts and want to make a lot of money, but there's no such thing as a shortcut to the top—if there was, wouldn't more people be there?

5. The Salted Gold Mine Scam 
The Scammer: Owners of valueless mines
The Victim: Speculators
This is an oldie but goodie. Back in the day, dishonest mine owners would put a few gold nuggets in worthless mines to convince prospective buyers the mines contained a ton of gold so they could get them to buy their claims. As the story goes, some old-time scammers even used to fire shotguns loaded with gold dust into the sides of the mines to ensure buyers were fooled.

Takeaway: Thanks to technology, we don’t have to take anyone’s "word for it," because there’s a wealth of information available to you, if you do your research. Don’t buy anything without at least checking out a seller’s online reputation.



6. The Milli Vanilli Scam
The Scammer: Mili, Vanilli and the production team
The Victim: Your ears
This pop duo tricked the world by lip-syncing every song they sang. We bought what they were selling, or rather singing, like mad. We ultimately found out the music was real but they were fakes. They couldn’t sing at all. But man, they could dance.

Takeaway: Don’t lie. You will always, always get caught—maybe not today, or tomorrow but eventually the truth always comes out.

7. The Ponzi Scheme
The Scammer: Charles Ponzi
The Victim: Countless investors throughout time
In the 1920s, Charles Ponzi tricked thousands of New England residents into investing in a postage stamp speculation scheme. At that time the annual interest rate for bank accounts was just 5 percent, but Ponzi promised investors that he could provide a 50 percent return in 45 days and a 100 percent profit in 90 days. He continued to convince people of its success by taking new investors money, and giving existing investors the money to show the high returns. He would then get them to invest more and use the money to pay off other investors. The whole time he was skimming money off the top for himself. The whole scam fell apart when he couldn’t get enough new investors to keep up with the demand for returns. And, of course, as with most scams it sounded too good to be true, yet people bought into it anyway, and lost their life savings.

Of course, sometimes we never learn … Bernie Madoff pulled this scam and people lost billions of dollars.

Takeaway: You work hard for your money; invest it in yourself and in your business first. If you're handing it over, make sure you know where it's going.

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Lessons from the 7 Biggest Sales Scams of All Time
A study that crunches SBA loan data reveals the biggest lemons in the franchise world.
 

Think in an uncertain economy there's some safety in buying a franchise of an already-established brand? A new report suggests that's true only if you choose very, very carefully. 

Seeing a Pattern

The report found that 11 franchises—more than half ice cream or fast food—had the highest rates of failure of their federally guaranteed loans used to buy them in the first place, according to analysis of U.S. Small Business Administration figures done by BlueMauMau.com, a franchising news website.

This is the same list that the agency provides loan officers of its most trusted lenders and banks throughout the country, the site says.

The SBA calculates failure rates by adding the number of liquidations to the number of loans charged off, divided by the total number of loans taken out within a franchise system. SBA borrowers (the franchise owners) personally guarantee these loans, often putting up their homes or other personal assets as collateral. Blue MauMau's analysis includes only franchise systems with more than 50 SBA loans.

The Best of the Worst

Don Sniegowski, who runs the website, told the Orange County Register that the brands on his "lemon list" criticize his methodology, primarily because he includes only SBA-guaranteed loans, which tend to have riskier borrowers. Plus, some bank officers don't fill out SBA's form correctly. 

"Franchisors that appear on this list don't like it, and others have their own lists, but the brilliance of the government [information] is that we know how they came up with the list," he told the OC Register.

Winning the dubious honor of highest percentage of failed SBA loans was Golf Etc., a golf retail shop franchise, with 71 percent failing. Last year's "winner" was Kansas-City based Mr Goodcents Sub, with a 64 percent loan failure rate. Though the sub company's franchises' fortunes continued to fail ­this year, they climbed to 65 percent. 

Here are the other 9 franchise systems where more than half the SBA loans failed:

  • Dream Dinners, 60 percent 

  • Planet Beach (a spa franchise), 58 percent

  • Carvel Ice Cream, 56 percent

  • Philly Connection, 56 percent

  • Petland, 56 percent

  • Beef O'Brady's, 54 percent

  • Cottman Transmission, 52 percent

  • Taco Del Mar, 51 percent

  • Juice It Up, 51 percent

To sum up the report, BlueMauMau asked this essential question: "Loan officers and franchise buyers realize that there are thousands of franchise opportunities to buy from, so why mess with the riskiest?"

It went on to say that, "Unless there is a miraculous reason why concepts with high failure rates are great investments, franchise investors may want to move on to other brands that have lower failure rates."

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Comment by Fedora McClaren on September 6, 2013 at 1:06am
many of (us)...
Comment by Fedora McClaren on September 6, 2013 at 1:05am
That's how many of are unfortunately financially desperate that we fall for these antics... Unfortunately...

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