MLM Corporate Startup
Essentials: Part II
(a three part series)

By Jeffrey A. Babener
©  2003

(Excerpted from the forthcoming book, Starting and Running the Successful MLM Company)

Rules to Keep in a Very Safe Place

The umbrella term for the business is "direct selling." Whether it is the variety practiced by Tupperware or Amway or Nikken or The Pampered Chef, it still is in the business "species" known as direct selling. Under that umbrella is found party plans, MLM or multilevel marketing, network marketing and direct sales. The objective is always the same, however...build a consumer products and/or services marketing company that distributes through a vast network of salespersons who sell both consumer products and services, as well as recruit and develop an even larger network of salespersons to sell, and for which remuneration is paid on the sales volume of those "downline" recruited networks.

  • MLM Business Experience: Possess it or buy it.
     

  • MLM Technology and Software: The engine of the machine.
     

  • Get the product right the first time.
     

  • International markets.

Although a significant force with upwards of $30 billion in U.S. sales and $90 billion in worldwide sales, it is nevertheless an ultra niche industry with its own culture and formatting. Those who understand this focused culture and business model can prosper, and others will be "strangers in a strange land."

Although it may look straightforward, starting the successful MLM business is no simple matter. A methodology course could fill a library. A practical advice primer could fill books. The following is an essentials sampler from an industry tour guide, a professional MLM Consultant and MLM Law Professional who has spent two decades as a "consigliore" or trusted business and legal advisor to legions of leading direct selling companies. Those companies have started in back bedrooms and garages and have grown and ranged in size from mom and pop boutique businesses to multi-national, multi-billion dollar conglomerates.

If you are looking for detailed insight from this author, attend a conference sponsored by www.mlmlegal.com, Starting and Running the Successful MLM Company, or read one of two books by the author, Starting and Running the Successful MLM Company or Network Marketing: What You Should Know. (Legaline Publications, 1-800-231-2162 or visit www.mlmlegal.com) However, for purposes of a "to do" list, consider the following very brief but very practical tips on starting the successful MLM company. Each of these factors is so critical that each one might be placed on the "make it or break it" list. In the first of three presentations, this article addresses issues of capital, recruitment, legal and trademark. In a second article, Part II will focus on equally key issues including MLM business experience, technology and software, product and international markets. Part III will focus on compensation plan, outsourcing, owner relationships and attitude and commitment. These tips are obviously not good enough to warrant being etched on tablets on top of a mountain in the Sinai desert, but they are worthy of being tucked into your MLM "bible" somewhere between "Solicitations" and "Celebrations."

MLM Business Experience—Possess it or Buy it!

As mentioned, MLM is not just any business. It is not retailing, franchising, e-commerce internet or dot com selling, telemarketing, catalog, direct marketing or infomercial. MLM, under all its names, Direct Selling, Network Marketing, Direct Sales, Party Plan and Multilevel Marketing, is a unique beast. To launch this business, you must have a substantial background and be well-grounded in its written and unwritten principles. If you know your product and you have a passion to bring it to the public, but you lack industry experience, then you must buy that experience. You may hire key employees in such positions as CEO, COO, Sales and Marketing, Customer Service and Distributor Relations, Information Technologies, etc. The payroll will add up fast and, unless your capitalization can sustain this ongoing cost, you should seriously consider outsourcing the solutions for these types of expertise. A first suggestion is to consult with your MLM attorney, who is likely familiar with the best resources in the business. Although limited, your search will disclose extraordinary resources in the area of MLM management consulting. Such industry established experts in areas of MLM startup implementation, compensation plan design and software selection are often tremendous team players and invaluable assets to your team. Above all, don’t launch without in-house or outsourced MLM business experience.

MLM Technology and Software—The Engine of the Machine!

"Having" great software won’t recruit one single distributor for you. Having said that, lousy software and inferior support will no doubt ruin what might have been a tremendous business opportunity. This business is a numbers business. It is built on recruiting, payouts on thousands of generations, genealogy reports to thousands of distributors, timely calculation and payout of commission checks to vast networks of sales people. The moment you fail in the technology area, you will lose confidence amongst your distributors. Prepare to watch sales, recruitment, retention and momentum plunge to ocean depths. Recovery may never occur.

And so, remember cheap is not good in the technology business. Good value is good, but not cheap. "You get what you pay for" is true in this acquisition. The fact is that cheap software usually means "cheap software" that is flawed and for which there is no backend support service of worth. Your software must work, it must be scalable such that your data tracking solutions, your web and e-commerce solutions and your reporting and communications solutions can grow with your business. These are important questions for those bidding for your software. Statements like "up and running in 24 hours for $100" are as invalid as "join our MLM and earn $10,000 in your first week." Of course, expensive does not necessarily mean good either. At least one software firm became infamous in the industry for promoting seminars that were little more than high pressure sales presentations in which unwary MLM startups were induced into astronomical priced offerings. Beware the high pressure sales tactic that does not afford you the opportunity to compare in the marketplace and check references and opinions. Your best sounding board is your MLM Business Consultant or MLM Lawyer.

Look for established providers with track records with established companies, but that is not to say that you should not "hold" their feet to the competitive fire. Established MLM software companies all bring different but important strengths to the table. Most major providers also offer design solutions for the MLM startup that involves web-based software support that can grow to licensed onsite technology as the company grows.

Get the Product Right the First Time!

If your software runs the "machine," and the business is the "machine," then your product or service is, as the French would say, your "raison d’être," your reason for existence. In looking back on history of the direct selling industry, a chicken and egg analysis makes it difficult to determine whether the business opportunity or product was the essential reason for commencement of the business. There are instances of both. The founders of Avon, Mary Kay and Home Interiors came from successful experiences in marketing other products. They found a product suitable for their marketing talents. On the other hand, the founders of Nikken, Amazon Herbs and Shaklee had a passion for bringing uniquely new products to the world and direct selling became the best vehicle. You will fit in one of these two categories. Whether it is one or the other, however, choose a product or service for which you can promote with passion. Be sure that the product is unique or that its formulation is unique to your company. If it is a commodity or generic product such as telephone service, then you will need to create another unique marketing edge, such as great service and value, to market the product. The better of the MLM products are those with high margins resulting from the "perception" of uniqueness in the marketplace. In the end, a company will only succeed when selling a product of high quality at a reasonable price to a market that purchases the product on its own merits. Over-priced products of dubious worth have no real long-term future. The death knell occurs when distributors are caught informing business opportunity meetings that the product is really irrelevant and is merely an excuse for the marketing plan. Another vocabulary term for this phenomenon is "pyramid."

Equally important to choosing the right product is the assurance that your marketing will not be impaired by poor planning. Your initial vendor agreements should be drafted or reviewed by MLM Legal Counsel so that you do not find yourself stranded without product, or worse, find your manufacturer in competition with you. Regulatory compliance is essential for such issues as FDA for labeling and claims, consumer standards for water and air products or compliance with discount buying legislation. If you are importing products, you should be assured in the beginning that your product will not be subject to embargo or detention. And, obviously, you should be assured that your distributors and customers would have an uninterrupted supply of product because you have established adequate capacity to produce the product or service.

International Markets

Having viewed the tremendous international success of companies such as Avon, Nikken, Amway, NuSkin, Mary Kay and Tupperware, many owners of startup MLM companies are tempted to go into international markets immediately. The short answer is "don’t do it." Starting the successful MLM company is a daunting and complex task, a process that should be perfected one step at a time. For most companies, it is important to first develop a working model in the United States or country of origin. Mastering the marketing plan, establishing distributor and customer service departments, refining the support technology, etc. are best accomplished in one country, with duplication and adaptation in foreign markets to follow once the machine is working in the home country. In addition, it is important to cause distributors to first focus their efforts in one market rather than ineffectively diluting their efforts in multiple markets. Of course, all rules have exceptions, and if your company is a multi-billion dollar conglomerate with worldwide retail stores or international catalog operations, the resources may be available for a multi-country launch. For the "small guy," the logical progression from the U.S. is to Canada, Europe, Australia, Asia, Mexico and South America.

Many companies believe that the internet has made international expansion an instantaneous event. Unfortunately, the internet and technology are far ahead of the legal and business requirements of going international. For those who really wish to approach international markets in a rational business and legal manner, the following points are summarized from the author’s article, MLM Going International, which can be found, with other resources, at www.mlmlegal.com.

  1. Corporate and Foreign Lawyers. Locate counsel in the foreign country that has expertise in direct selling. You may need to locate several different lawyers with expertise in direct sales, including food and drug, taxes, corporate structure, etc. Include your usual corporate counsel in the loop as you move into foreign countries to create some continuity throughout the world system
  2. Trademarks. Look into registration of your company trademark and product and service trademarks as early as possible, and preferably even before entry to the country. Companies are always surprised to find themselves being held hostage to well-meaning distributors or greedy pirates who have already registered important company trademarks.
  3. Consumer Legislation. Every country has variations on deceptive trade practices, laws, consumer laws and anti-pyramiding statutes. These vary around the world and you should check out the local pyramid scheme acts to make sure that your compensation plan and method of marketing are in tune. In fact, in many countries, you may be able to receive opinion letters, advisory opinions or approvals by government agencies as to the marketing program before entry.
  4. Earnings Claims. Check out the sort of restrictions that you and your distributors may make with respect the business opportunity you are offering and how it may be presented.
  5. FDA Issues. Food, drug and cosmetic laws vary widely from country to country. You may need to reformulate your product's ingredients. You may find yourself forced to manufacture within the country. Get an early start on labeling as this may slow you down considerably. Get yourself to a lawyer knowledgeable in FDA-type law.
  6. Product Compliance. Check out the government standards for manufacturing with respect to your product. Your product may need to be manufactured within the country. Specific type products may have their own regulations within the country. You will need to check out your entire product line on this point.
  7. Intellectual Property. In addition to trademarks, you may need to register patents for your products in the country. You may need to check out restrictions regarding transfer of intellectual property, such as software licenses, etc.
  8. Immigration. You will be sending key employees from company headquarters to work for indefinite periods within the country. You need to check out short and long term business visas or other necessary documentation for ongoing residency and local employment.
  9. Language. Verify language restrictions for labeling and literature. In some countries, you may be required to have dual language labeling.
  10. Banking. There will be large scale movement of monies in and out of countries. You need to verify restrictions on currency movement across borders and whether profits can be repatriated to the home country or must be reinvested in the foreign country.
  11. International Sponsoring. Every company has its own unique method for international sponsoring. Make sure that the new market is receptive to your method of international sponsoring. Determine the relationship of sponsoring distributors in both the home country and foreign country. Will distributors need to sign up country by country or is the company considering a seamless international sponsoring system with inter-company accounting for commission payments?
  12. Customs and Tariffs. Although more free trade is coming about in the world, you need to explore in detail customs and tariff issues with respect to your product into the foreign country. In particular, taxing authorities of foreign countries will pay attention to transfer pricing with respect to both customs issues and tax issues.
  13. Taxes. You need a good overview of national, provincial, sales, value added and other taxes. Your corporate counsel, tax accountants and foreign counsel need to advise you on the most tax advantageous method of operating whether it be as a subsidiary, an affiliate, a branch office, etc.
  14. Corporate Form. Must you have local ownership? Must you have local residence of shareholders and members of your board of directors? Will your distributors be considered employees? You need to fully understand what your presence will mean in the foreign country.
  15. Manufacturing and Supply Agreements. Must your manufacturing be local? If you are having local manufacturing, make sure that you have adequately secured under foreign law, your rights and responsibilities with respect to local vendors and suppliers. This may include both production as well as protection of your trade secret formulas of confidential information.
  16. Marketing Literature. Everything that is passed out to the consuming public or your distributors must be brought up to speed, including distributor agreements, policies and procedures, compliance with door-to-door sales rules, distributor cancellation rules, buy-back policies, termination notices, etc.
  17. Advertising. Before you bring your products into the country, are they required to undergo testing to verify claims that you may make about the product or other specific advertising rules that require compliance?
  18. Antitrust and Trade Regulations. You need to check out restrictions on pricing, relationships with suppliers and vendors, relationships with your distributors, relationships with the other competitors, etc., all to verify that you are not in violation of local antitrust and trade regulation rules. For instance, may you ask your distributors to adhere to suggested prices or trade practices imposed by the company?

This Advice from Experience

You won’t find these rules in a textbook. You will not find them in a college course. You will not find them at Staples or Office Depot. You most definitely will not find them by consulting with corporate business lawyers or general business advisors. These very important factors are forged in the furnace of experience. These are practical rules that arise from two decades of practical hands on involvement. These rules come from the school of "been there, done that." If you pay attention, is success guaranteed? Well, go to rule  number one, which is "success is never a sure thing, but opportunity is always guaranteed." Look for more detailed “rules of engagement” in Parts I and III of MLM Corporate Startup: Essentials.


About the author: Jeffrey Babener is widely recognized as a leading legal counsel in the MLM and direct selling industry. His law firm, Babener and Associates, has, for two decades, represented leading direct selling companies headquartered throughout the U.S. and abroad. He lectures extensively at such universities as the University of Illinois, University of Texas and University of Houston, publishes extensively in books and articles and has served on many committees of the Direct Selling Association as well as general counsel for the Multilevel Marketing International Association. He can be reached at his Portland, Oregon office at 503-226-6600 or visit his website at www.mlmlegal.com for an expansive selection of information on direct selling, MLM and network marketing.


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