Sunday, December 16, 2012

Due Diligence applies to business opportunity

Multi-Level Marketing
Multi-Level Marketing (Photo credit: Larry L for school)
Previously I've covered what constitutes "due diligence" when it comes to an "income opportunity", such as a MLM. I then ran into an article at Investopedia that talks about 10 steps you should do before you invest in a company.

MLM crowd, esp. Robert "Rich Dad" Kiyosaki kept saying "own a part of the system" like an investor. Well, why not apply the same due diligence to a MLM? When you join a MLM, should you not apply the same sort of criteria on the MLM company?

So, here goes, with the questions slightly rephrased for more relevant. And there are a couple items that doesn't apply to MLMs as they are not public, but there are a couple items that are important.

1) How big is the company? 

Most MLM companies are tiny, run by a few people. They will often claim that they run lean, and most of the work are done by you affiliates, but that begs the question... are you actually affiliates, or just not-quite-employees that have to put in your own money?

The size of the company is also indicative of how stable they are. BIG MLM companies like NuSkin, Amway, Herbalife, the ones that are public and had been around for many many years, have sales figures and other public info that you can look up. In general the larger the company is, the more stable its business model (and how trusted its products are). The fad-pills-of-the-week  companies generally don't last more than a year or two.

The smaller the company, the higher the risk.

2) Revenue, Profit, and Margin

A publicly listed company such as the big MLM companies have figures you can look up, and you want a company that has steadily growing revenue, stable or rising profit, and good amount of margin (sales to profit ratio). This is even MORE important in MLM as that margin is what you get paid out of.

If this is a private company that does not publish any figures, then you will have nothing to research on, and this is a major risk factor.

3) Industry and Competition

What sort of competitors does this company have? Is this industry growing?

MLM can be mixed with almost any sort of consumer good or service, but most MLMs seem to be mixed with some sort of nutritional supplement, as that generally enjoys huge margins, yet there are bazillion competitors, so they resort to buzzwords like "stem cell", "super-fruit", "glycobiology", and so on.

Consider this for example... Is a new upstart that supposedly sells weight-loss drinks going to be much of a competitor against, say, Slim-Fast, which has been around for decades?

4) Management

Who manages this company? Not your upline, but the executive team at the company, the president, CEO, COO, etc.

What history do they have? This is actually something I covered before in that previous due diligence blog post. If it's a bunch of people you can't look up or have NO signs on the Internet, then it's a sign of suspicion.

5) Expections

What do people *really* think of this "opportunity"? NOT those who're in it and trying to recruit you, but the general public, the critics, and so on. Do they really think the company is going to do well in the next SEVERAL years? Were you only looking at the GOOD news? Have you searched out the BAD news? Or are you going to cherry pick the news you get and thus, "stay with positivity" until it leads you over the cliff?

6) Risks

Every MLM is always in danger of going over the cliff and becomes a pyramid scheme, and thus, get shut down by state DOJs, FTC, or in some cases, SEC.

Do you know the risk factors on what actually makes a MLM business illegal? Do you know the four signs of a pyramid scheme? If you don't maybe you should find out.

Do they even have a MLM lawyer for consultation regarding compliance issues?

After all, owning a piece of illegal system would be pretty darn worthless, wouldn't it?

This article was inspired by

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