On a recent trip, I met a network marketing distributor who has been working his business part time for about 10 years. When I asked him how he was doing, he answered, “I am not making any money yet.”
A recent notice from the Federal Trade Commission regarding the recent settlement with an established network marketing company gives an “eye-opening” view of what the FTC looks for in evaluating the legitimacy of a network marketing opportunity. Check out the excerpt below to see if the company you are representing meets the criteria set out in the settlement:
“You might have read about the FTC’s case against a network marketing company that offers a business “opportunity” that promises big money from selling energy drinks. In 2015, the FTC filed suit, alleging that the nutrition company was running an illegal pyramid scheme and targeting college students.
“Well, recently the company settled with the FTC. Under the settlement, the company’s business cannot be based on recruiting more and more people to join the network as distributors. Instead, the business has to be driven by real sales to real customers outside the company network. In fact, the company will be able to pay distributors only if the majority of the money generated in that sales period came from sales to people outside the company network. And the company can’t mislead people about how profitable the business could be—or about the so-called health benefits of the product.
“If you’re considering going into a multi-level marketing business, or know someone who is, do yourself a favor. Start with some research, which could save you time and money down the road. And consider these questions:
- Can you see yourself selling to your friends, family, and other people you know?
- Will the people you know like this product? Will they buy it once as a favor? Would they buy it repeatedly and consistently? For how long, and at what price?
- How much will it cost you to make those sales? Consider not just the cost of the product – but also other things like gas, shipping and packaging costs, sales aids, trainings, and your time. What does the math say about the costs versus your realistic sales and income projections?
“Keep in mind that in a legitimate multi-level marketing program, you make money by selling the product, not by recruiting others to join and buy product. Remember, if you can’t make money selling the product, others probably can’t either.”
Sandy’s bottom line:
The key seems to be that the FTC requires substantial sales to non-distributors. There should also be a decent commission paid at the first level for direct sales to customers so that distributors can make a living simply selling product to customers without recruiting anyone. If the company that you represent doesn’t meet these criteria, they might have a major issue in the future.
Forewarned is forearmed!
Sandy Botkin, CPA, and former IRS Attorney is the president of the Tax Reduction Institute of Washington DC and lectures all over North America. Sandy was formerly a senior tax specialist with the national accounting firm of Touche Ross (predecessor of Deloitte Touche). Sandy is a bestselling author and has the highest rated tax planning book in the US entitled, Lower Your Taxes—BIG TIME