Sunday, July 15, 2012

What exactly is "due diligence"?

Due Diligence means you need to investigate.
But do you what to look for?
A lot of MLM grunts (see 6 types of MLMers) are so new to the segment that they don't even have an idea what exactly constitutes "due diligence".

The short version: "trust, but verify". Reagan said that when Gorbachev want to promote "Glasnost". Due diligence is that "verify" part, and with search engines finding info is easier than ever.

However, a lot of MLM grunts don't even know what questions to ask, so here are the four fundamental questions:

  • Is the company and its leaders/execs reputable?  
  • Does the company have a good product line that people will want to buy? AND pay a premium for? 
  • Is the comp plan rewarding to you, instead of stacked in favor of the company? 
  • Does the company support the affiliates, through training, service hotline, and so on? 
Let us explore each topic in turn. 

Is the company and its leaders / execs reputable?

When a company is coquettish about identity of its leaders and/or its physical address, you should not touch it with a ten foot pole. A "private registration" (i.e. domain by proxy) is a HUGE red flag, because you can't search for something that is not visible. 

Next thing you do is verify the company's address, make sure it's a real address, not a P.O. Box (provided by UPS Store or such), or possibly a "virtual office". 

Third, check the company registration database of that state, usually at that state's attorney general website. Make sure the company exists, and the info available matches up. ANY sort of deviation, or lack of name, should immediately raise suspicion. If the company doesn't list any executive names and/or they don't match up with corporate records, stay away. 

Look up each of the names. If it's unique, there should be some record of them, unless you run into generic names like "Robert Smith" or "George Lee". Those are suspicious, as they are impossible to research. 

If the person has a history, esp. in MLM, beware. Make sure their previous ventures are successful ones, though often they are abject failures. Worse if they were accused of fraud before. 

Study the business model. What are you doing for them in exchange for pay? In any MLM, it should be "sales commission", and ONLY sales commission. Pay on recruiting is a sign of pyramid scheme, and pay depending on your own contribution into the system is a sign of Ponzi scheme. (Please see article: what is the difference between MLM and Pyramid Scheme)

If the company requires a license to operate, does it have the proper licenses? Don't assume. Check. 

Check BBB, Attorney General's Office, and other public sources about the company, even online forums (though those are somewhat less reliable). You want to see that problems are resolved. 

Does the company have a good product line?

In a MLM, there needs to be a HUGE markup on the product from wholesale to retail, because the affiliate needs to pay training and marketing out of the "profit" or "commission", and STILL make money. This usually means that MLM would be selling things with large profit margins, such as cosmetics, nutritional supplements, and such.

If the products are "consumable", i.e. they are CONSUMED, and perishable (only limited shelf life), even better. Because you are often assured of a repeat customer if you can get them to like the product(s) at first, and the price and such remains competitive.

You also don't want competition, as competitition drives down prices, shrinks the margins, and thus, hurts your sales and profits.

If a product competes with something already on the market, then it better be just as good, but quite a bit cheaper, while STILL giving you a ton of profit margin.

MLM sales of non-perishable item that is NOT consumed is idiotic, IMHO.

So, does the company actually sell stuff that has little competition, lots of profit, and thus, make money for you?

Is the comp plan fair, instead of tilted toward the company?

The more complicated the plan, the most likely it is tilted toward the company instead of rewarding you. Avoid complicated plans. If you don't understand it, then you don't know what you need to do to achieve your goal. That is bad.

Please read "Danger of overly complicated comp plans".

Does the company support its affiliates?

With the Internet you can do webinars, recorded videos, and more for minimal cost. With VOIP, phone bills are slashed, so there's little excuse for a company to NOT have a proper support structure for the affiliates. Look for things such as FAQs, guidelines, what can be said and not, ethics rules, clearly defined rules and roles and agreements between you and the company, so on and so forth. Then look for online support forums (both official and unofficial), e-mail question line, live online chat, and more.

Company should always pay on time, and be transparent about any problems and explain how they will be solved. Blanket proclamations about "everything is fine" is a sign of DANGER.


These are by no means the only answers you should ask, but rather, just to get you started.

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