May I See Your Schedule C?

 A Simple Strategy to Distinguish between MLM Business Opportunities and Bankruptcy Opportunities

“I just got involved in a fantastic new business that will soon allow me to quit trading my time for money and be my own boss. This DVD tells all about it. Why don’t you take a look at it and let me know what you think?” “Would you like to come with us to a meeting where a doctor is presenting the revolutionary science behind a ground-breaking solution to America’s obesity epidemic?” “We’re having a few people over for dinner Friday night; and we’d be delighted for you to join us.”

These are just a few examples of how virtually every consumer has been or will eventually be prospected—most often by a trusted associate, friend or family member—to enroll in a multi-level marketing (MLM) business opportunity.

On March 1, 2012, the Federal Trade Commission promulgated its Revised Business Opportunity Rule. Accurate disclosure of documented distributor income data and a seven-day cooling-off period before closing a business opportunity sale are among the rule’s key mandates. MLM—the largest base of sellers in the business-opportunity marketplace—was explicitly excluded from the new rule’s provisions after a vigorous lobbying campaign by the MLM industry.

Few MLMs voluntarily disclose income data; and without regulation, the data they do disclose is susceptible to covert but technically legal manipulation. For example, some MLMs omit the minimal incomes earned by a high proportion of new distributors, who become inactive within a year of enrolling, from their calculated income averages. This significantly skews reported average earnings upward. Consequently, unregulated disclosures are essentially useless as a true measure of any business opportunity’s viability. Unfortunately, there’s no way to detect disclosure irregularities without extensive time-consuming research.

With only nominal regulatory protection, the question becomes, “How can consumers recognize MLM business opportunities that are more likely to be costly than to be profitable, despite their implied promises of financial success?” The answer lies in consumers’ willingness to take an active role in their own defense.

This article describes a method that is surprisingly simple, easy to remember and effective. It is eminently fair to all concerned, perfectly legal and part of the due diligence entrepreneurs in other settings exercise when considering any collaborative business proposition. Here’s how it works:

Once it becomes apparent your encounter with anyone is or will be taking place in the context of their role as an MLM business opportunity seller,[1] control of your part in the encounter is completely in your hands. Simply ask the seller to defer their pitch (interrupt if you must) and inform them that it’s your practice to require proof of a business opportunity’s viability before you invest your time listening to an entire presentation.[2]

The proof you will request is a true copy of your seller’s most recently filed IRS Schedule C for their MLM business. Line 31 shows their “Net profit or (loss)”.[3] If this figure is positive, the proposition may merit further investigation, although you’re not necessarily safe. If on the other hand, line 31 shows a net loss, you’d be wise to assume that you too would sustain net losses in the same business.

Your seller—most likely a neophyte distributor—may tell you in all honesty that they haven’t been in business long enough to make a profit. If that’s their response, ask them to produce the requested documentation from the person who recruited them; and suggest they keep going up the line until they find someone who is able to produce a qualifying document. The greater the number of upline levels they have to go in their quest, the lower your probability of success as a distributor.[4] At best, only one in ten MLM distributors make a net profit; and it’s possible your seller will give up before they get to someone in their upline who can actually show bona fide proof of their business’s profitability.

Business-opportunity sellers who are knowingly deceptive will offer any of a variety of excuses for failing to fulfill your request. Nevertheless, if you are persistent, their excuses won’t sway you; and malevolent sellers will look for victims somewhere else. 

Cautions:

• To make this request of a friend or family member is difficult. In fact they may be offended and imply that you don’t trust them. However, keep in mind that they are asking you to invest your money, as well as your valuable time and reputation in their proposition. It is by no means inconsiderate to point this out to them. If their protests become aggressive, it’s an indicator of their lack of respect for your legitimate interests.

• Don’t accept substitute documentation. The penalties for filing fraudulent income tax returns are sufficient to give you some assurance of a filed IRS document’s legitimacy.

•  If your seller suggests that having a home-based business allows them (and you) a pretense for writing off ANY non-business related expenses, walk away. The person who makes that assertion is committing and encouraging tax fraud—an automatic disqualifier to a prudent consumer.

•  Don’t allow yourself to be drawn into a conversation with anyone in your seller’s upline or whom they introduce as a mentor in their business until you’ve actually seen the requested document. Most often, that person is a designated closer, whose role is to close the sale without delay;[5] and to them, your exercise of due diligence poses a risk of delay. It follows that it’s in their interest to persuade you that such rigorous measures are unwarranted. Moreover, if a closer is present in the encounter without advance notice to you, your seller is being deceptive. If this is how the encounter unfolds, the deck is already stacked against you. To walk away is appropriate boundary setting and is neither inconsiderate or a breach of etiquette.

• Before you sign anything, require your seller to provide you with a certified photocopy of the IRS document they show you as proof of their business’s profitability to retain for your records. This gives you written documentation if it turns out you were misled.

• Consumers can easily be lulled into complacency by the relatively low cost of initial entry into an MLM business opportunity. However, the costs to upgrade your status in order to qualify for maximum commissions and bonuses, acquire updated marketing materials and training, or participate in frequent “special promotions” are rarely if ever disclosed upfront. And the neophyte distributors most likely to invite your participation in the opportunity may be unaware of them.

• Finally, beware of ANY proposition that promises quick or easy money, a fast track to health or to success in any aspect of life. As a rule, propositions of that sort prove to be deceptive and predatory. If there are exceptions, they are difficult or impossible to find. 

In the nominally regulated MLM business-opportunity marketplace, consumers are left to navigate predator-infested waters on their own. Even were effective regulation in place, wise consumers would still remain their own most effective protection.

Caveat emptor—Let the buyer beware.

Note: If, by your due diligence, you expose the futility of a particular MLM business opportunity, you may influence someone you care about to re-evaluate their own involvement before it drains them of additional valuable resources. It’s not unheard of for persons who succumb to deceptive business-opportunity pitches to lose literally hundreds of thousands of dollars before they realize they’ve been deceived. Perhaps worse, the social costs, in damaged relationships and lost credibility, of pursuing an illusory MLM dream can be catastrophic.

[1] The initial encounter may begin by highlighting a product. However, the product demonstration frequently precedes and initially camouflages a business-opportunity sales pitch.

[2] If you defer this requirement, you’ve lost control of your part in the encounter; and you run a high risk of being subjected to recruiting tactics designed to dissuade you from due diligence.

[3] IRS Schedule C applies to a sole proprietorship—the structure your seller is most likely to use for their MLM business. If their business is structured as a partnership, their “Ordinary business income (loss)” is shown on Page 1, Line 22 of their IRS Form 1065. If their business is incorporated, “Taxable Income” is shown on page 1, Line 30 of their IRS Form 1120.

[4] Briefly, new MLM distributors are recruited into exponentially expanding downlines. This means that, assuming all other relevant factors are equal, for each upline level your seller has to go in search of a qualifying document, your chance of replicating that upline member’s success is cut by the inverse of the exponential base used in their MLM’s system. i.e. if the base is 2 (1 recruits 2, who each recruit 2, etc.), your chance of replicating the success of your seller’s immediate upline member is only ½ your chance of replicating your seller’s success. Your chance of replicating the success of the upline member in the next level up is ½ x ½ = ¼, up one more level, ½ x ¼ = ⅛ and so on. The larger the base number, the more quickly your chance of replicating an upline member’s success diminishes.

[5] An experienced closer understands that if they don’t close a sale while their pitch is still fresh, the probability of closing is greatly reduced. Furthermore, the purpose of your due diligence is to determine a proposed opportunity’s financial viability. If you uncover a business plan’s futility in advance, you can avoid the risks inherent in opening yourself to a skillfully misleading sales pitch.