MLM Due Diligence: 
How to sort the good from the bad and the ugly

by Coach Davender on November 20, 2011

The economic slowdown has people looking for other ways of making ends meet. Lately I’ve seen an uptick in the number of network marketing / MLM opportunities. Just this month (November 2011) I’ve had three people approach me to pitch their opportunity.

I personally like network marketing,having had a certain success with it. I started with the venerable Amway when I lived in Northern Alberta back in 1992 – which was a good deal then even as a customer, because the nearest real shopping was a four hour drive to Edmonton. I broke through the beginner barrier in 2002-2004, making a good supplementary income with Usana Health Sciences (Disclaimer: I terminated my distributorship with Usana in 2006 to focus on my coaching business). I also lost money with companies in telecommunications, nutritional supplements, business services and website storefronts. In three of those losing situations, the companies went belly-up. In one case in particular, the first commission check I received ended up bouncing.

I discovered what works in network marketing, and what does not. Network marketing is where I learned how to sell, how to work with a team and how to be a good sponsor, upline and team leader. I also learned how to deal with the politics, backstabbing and betrayals of uplines, crosslines and company headquarters. So I have a personal experience of the good, the bad and the ugly of MLM. And this has convinced me of the importance of performing a good due diligence before signing up.

Here are points that I look at when I’m presented with an opportunity. This list is more thorough than most you will find on the web, and at the same time not as thorough as it could be. Some of these questions might not apply to your opportunity, but if any of these things cause you to respond with “no” or “unsure”, definitely think twice before handing over your credit card.

Some of these points come from my own experience of what can go wrong. See if you can spot them!

(Full list after the fold)

Davender’s MLM Due Diligence Checklist

1. COMPANY MATURITY AND LEADERSHIP TEAM

When signing up as a distributor for a company, you are basically becoming a partner with them. After all, if you are going to invest time, money and your reputation building a distributorship, don’t you want to make sure they are able to deliver what they promise? So it makes sense to check them out.

1.1 Is the company in pre-launch or mature? The advantage of joining a company in pre-launch is that you get to be “first in line”, knowing there are few other distributors competing in your market. The disadvantage is that a startup doesn’t have the systems in place or the financial resources for the long haul. Companies in startup mode also will make changes to the distributor agreement and commission plan, sometimes not to your advantage (even if they spin it that way)

1.2 How do they accept payment? Always make sure you can pay via credit card, so if you get in a dispute with them you can request a chargeback from your card issuer. They must accept credit cards from their own merchant account and not just a PayPal gateway.

1.3 How professional is their web site? The Corporate web site (of the home office, not just the distributor replicated site) must be professional. If it is a generic WordPress theme with anonymous stock pictures, then be careful. Reputable companies will have photos of real people (employees, distributors, customers). Check out their ranking on Alexa.com – if traffic is going down then they are dying. If there is no ranking, or is not in the top one million sites, then either it is too early, or the company is dead. You can count on people you approach to at least Google the company.

1.4 Is the company private or publicly traded? If it is a publicly traded company then you should be able to get the financials. Does the company have a good positive cash flow? How much debt does it carry? What does it say in the SEC disclosure fine print? If the company is private, it is harder to validate their financial situation. You may have to contact the home office to request them (you can always try it). Remember, you want them to be able to pay the commission checks they will owe you!

1.5 Is this business legitimate? Check out the state/province corporate registry (if possible) to confirm the company is legally registered. Then search the trademark database and their website whois. Do they all point to the same entity or address? If they don’t, it’s not necessarily bad, but at least one of these should point to the company headquarters.

Check out the street address of the company headquarters on Google Street View. If the business name is not prominently displayed on the front of the building, or if the company headquarters is not in a business park or office building, walk away. If the headquarters is in a suburban (or rural) strip mall or a private home, walk away. If all they provide is a PO Box, walk away. You will want to do the same with their distribution center. If they subcontract distribution, I consider this a negative point, however make sure it is at least a reputable company (do the same due diligence on the distribution center).

Note that Googling the company name + “scam” or “review” will rarely provide vaild information on the legitimacy of the business, because either the company or other distributors are flooding the web with positive promotional articles using these keywords. You may have to dig deep in the results before you find something.

Similarly, I don’t put much stock in BBB membership or listings. However if there are complaints, walk away.

1.6 Is the company the original manufacturer or do they resell products and services from another provider? If the company manufactures and ships its own products, they have every incentive to ensure quality service and to stay in business. However there has been a proliferation of “virtual companies”, especially in telecommunications, energy services or consumer discounts, which simply resell products or services from other providers. Being simply a sales channel for the original producer, these companies have less incentive to stick around if the going gets tough. The original provider can also terminate the distribution agreement with your company for any reason. And you definitely don’t want to see the exact products you are selling be also easily available on the shelves of your neighbourhood store.

1.7 Can you respect the leadership team? Google the names of the founder, CEO and senior company officers, which should be prominently available on the corporate web site. Dig deep (to at least page 20 or 30 of the results). If they don’t have that many results, then this is a possible warning sign. Check out their LinkedIn, Facebook, Twitter pages. If they are not on LinkedIn in particular, walk away. Are these people you can respect? Are their experience or qualification claims valid? Are they connected to people you can respect? Can you visit the home office in person and speak to the company president or at least the VP responsible for distributor relations? Is there a VP specifically responsible for distributor relations?

1.8 Are they licenced to operate in your country/state? This is especially important for business coming from abroad. Who holds the business licence? It should be a legally owned subsidiary (and not a private person). They should have a local corporate office in your country. Can the products be legally imported into your country or state without restrictions? Do they have valid tax numbers and business numbers for where you live?

2. COMPENSATION PLAN AND COMMISSIONS

2.1 Is the compensation plan clear? You should be able to easily obtain the compensation plan, either directly on the corporate web site or from the person who approached you. It should be easily summarized on a two-sided page. You should be able to repeat back the main features of the compensation plan to the person who presents it to you, even before you sign up.

2.2 What investment is required? Today (2011) your upfront investment to become a distributor should be no more than $500, but more than $0. You want people to have to invest something to ensure they will take the responsibility seriously. The yearly distributor renewal should be no more than $99 (actually below $50 is more reasonable). What is the minimum monthly personal order you need to stay qualified for commissions? Will you personally consume this amount?

Make sure to read the distributor agreement before signing anything. Bonus points if you give it to your lawyer and there are no objections. What are the conditions under which the company can unilaterally terminate your agreement? What happens if you change your mind? Or you wish to terminate?

2.3 How do you generate commissions? The bulk of your commissions should be from product/service sales you generate yourself, plus a percentage of the sales the distributors you sponsor make. When I was active in MLM, the trend was to pay on “balanced legs”. But it’s very difficult to keep legs balanced. Today at least part of your commission should be on global volume of your downline. Also look how deep you get paid. If they claim you get paid “to infinity”, look at the fine print. If you get paid to at least five levels the plan is probably legit. Avoid matrix systems (where you can get paid just for occupying a space and doing nothing) and breakaways (where the company removes the top performing distributors from your downline). Both stack the deck against you.

If you are paid a “bonus” (also called a “training bonus”) for each distributor you sign, consider this to be illegal. Some jurisdictions consider this to be a sign of a pyramid scheme, and companies have been shut down, and distributors arrested.

Watch out for “Sales Volume” (SV) point systems. They should closely track the actual retail (or at least the wholesale) price across all the whole product range. Sometimes companies adjust SV downwards depending on your country, so you could lose out twice, once on the SV and again on the currency conversion.

Can you estimate how many customers/orders/ sales volume (in dollars) you need to get your first commission check? To get a monthly check of more than $500? A weekly check of more than $500?

2.4 How do they pay you? How they pay you gives you an insight into the professionalism of the company. Weekly payments are preferred to monthly. Avoid payments by a company-issued debit card or prepaid credit card, which often come with very high usage fees. You should receive a check (computer-printed) or direct deposit. Send it to a separate (personal checking) account at your own bank which you use only for your business. Also check the currency conversion rates to make sure they fairly reflect the open market rates.

3. PRODUCTS AND SERVICES OFFERED

3.1 What are the products and services offered to your customers? Are they consumable products or monthly renewable services? Remember that if you have to get a new customer for each sale, then you cannot build a sustainable business.

3.2 Is the company positioning coherent and consistent? If the company offers a variety of products or services, how are they connected together? A nutritional company that also offers telephone service is probably suspect. Has the company made major pivots recently (an energy distribution company that becomes a web advertising company)? At a minimum, if you cannot communicate a coherent positioning, you will have a lot of difficulty presenting your offer to potential customers.

3.3 Are all the products and services available where you live, right now? The availability and legality of products and services can vary a lot according to city, province/state and country. If not, what is the delay? If the reason is regulation, then walk away, because you have no control over it. Does the product or service meet all of your local safety and approval regulations? If you are building a distributor network in hopes that the products will be available some time in the future, be prepared for many of the distributors you signed up to walk away once the product is available.

3.4 Are the products or services competitively priced compared to the open market, especially for non-distributor customers? Are the savings interesting enough to get people to switch? What is the product return and refund policy for customers? Can customers sign up at no charge to buy from you, and can cancel at any time without penalty?

3.5 Are the products shipped directly to the customer? You want to avoid having to carry any inventory (which needs to be rotated and accounted for), and especially having to hand-deliver product.

3.6 Is it something you personally would buy and fully use even if there were no company attached to it? Is this something you are personally excited about because of the intrinsic quality of the product or service? What is the reputation of this product niche? Can you be proud of what you offer?

4. TEAM AND REPUTATION

4.1 Do you like your sponsor? Does he/she have experience building a team? If not, who is the active upline who is doing the training and opportunity calls? Attend one of the trainings or calls. How many levels up do you have to go until you reach someone who earns the equivalent of a “full-time” salary? Do you like your sponsor and your upline as people? Do you see them as colleagues you can easily approach for help, advice or encouragement? Really trust your gut here.

4.2 Do you like your team? Do distributors work together as a crossline team? Or is their strict upline/downline discipline? One is not worse or better than the other, it mainly depends on your personality style and values. I personally prefer crossline collaboration.

Also, consider that every other distributor is a competitor at the same time. Are there too many distributors? What is the resolution policy if someone approaches a prospect you’ve approached? Or if you (knowingly or unknowingly) approach someone who has been approached by another distributor? Is your local market saturated with distributors? You can make money operating a Starbucks, but do you want to be the fourth shop on the corner?

4.3 What is the reputation of your company and your product line? Does the company already have a reputation (good or bad)? Or your product or industry? For example, if you offer nutritional supplements, many people have already made up their mind about nutritional supplements marketed via direct marketing, so trying to change their mind to switch to your offer would be a waste of time. Similarly, getting people to switch from an established telecom or energy provider to your service is made more difficult if they already have preconceived notions. Sometimes money savings is not enough of an incentive. Do you have the skills to navigate past people’s prejudices towards your product category, the industry, the marketing channel or even towards you?

5. FINAL GUT CHECK

5.1 How does this opportunity fit into your current business? If you are already promoting your own services as a self-employed professional, how does this opportunity fit into your current offers? Or is it something completely disconnected from what you’re doing now? Can it damage your positioning? Or help it?

5.2 Is there a potential conflict of interest? Are the offers of this MLM similar to those of one of your current suppliers? Is there a potential conflict of interest if a prospective client comes to see you about your primary business, and then you steer them to your MLM as a customer or distributor (a kind of bait-and-switch)?

5.3 Is this something you can be proud to be doing? Look at yourself in the mirror and say out loud “I am Mr. (company name)” (or Ms.) How does it feel? If you feel any hesitation, think twice. Is this a field you are naturally passionate about? Would you do it even if there were no money? If you are only doing it for the money, think twice, because it will be a while before you see any serious cash.

5.4 Are you serious? Are you ready to commit the next 12 months, at least one day a week, to building your new business? Are you willing to invest $5K to $10K over the next year, including going to the annual convention? If the answer to these two questions are “no” then back out now. You can’t do this on the cheap. And it can be a while before you generate a return on investment.

You never have to sign right away. Step back from the table and the glow of possibility, and take the time to do your due diligence. If the opportunity is a good one, you can say yes at almost any time and the opportunity will still be good.


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