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MLM Corporate Startup Essentials: Part I

Article by: Jeffrey A. Babener | Founder, Babener & Associates
June 25, 2015

(Excerpts from the book, Starting and Running the Successful MLM Company) Part 1 of 3

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. But, the objective is always the same: 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.

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.

For the 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 2 will focus on equally key issues including MLM business experience, technology and software, product and international markets. Part 3 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.”

Capitalization—can you recruit?

Do you have a great recruitment background, the ability to recruit, or a lineup of strong distributors? If so, your need for capital will be substantially diminished. In the end, your ability to recruit a talented and motivated sales network will be the number one key to your success. In fact, your need for capital is in direct inverse proportion to your ability to recruit. If you can recruit, you may have a cash cow on your hands. If recruitment will go slow, your business plan needs to allow for buffer capital to hold you through one, two or three years of break even or loss scenarios. That capital should be lined up ahead of time, either through personal and close relationship resources or through angel investors. The likelihood of public financing for the new MLM is very remote. Time after time, the best source of capital is literally “closest” to home. Your ability to manage expenses will be very determinative of your need for buffer capital and you will find that payroll infrastructure will “eat up” capital faster than anything else. Can you make it in this business by starting in a back room or garage? Absolutely! The fact is that most of today’s giants started precisely this way…with little capital, but much passion.

Recruitment capability

You need to be honest with yourself. Do you or those who are key owners in the business have MLM recruitment background? Without this talent, the best products will continue to languish on the shelf. Companies like Amway, Tupperware, Mary Kay and Home Interiors were not only founded on a very limited budget, but by individuals with strong backgrounds in direct selling. Develop a recruitment strategy for initial key leaders. It may seem odd, but your top distributors may not come to you for years. To those would-be leaders who come to you seeking special benefits or corporate positions, design remuneration that is “results oriented.” Do not pay high salaries to individuals who claim to be able to recruit, but cannot demonstrate a strong track record of success. As a general matter, if individuals are strong recruiters, they would be distributors because the remuneration is much higher. Obviously, track your warmest market, then move on to lead generation systems and advertising. You shouldn’t expect initial advertising to bring you distributors, but consider it instead a foundational industry announcement that you have arrived on the scene. For instance, the best place to create the institutional announcement of your existence is in a leading trade publication. Notwithstanding all of the hype, however, about internet, direct mail or mechanized recruiting campaigns, history demonstrates that this will always be a person- to-person relationship business and that there is no substitute for “pressing the flesh.”

MLM legal—don’t leave home without it!

At first blush, one might question the role of the MLM Law expert in a marketing driven business. However, your MLM Lawyer may well be the single most valuable resource that you ever utilize. This individual, and there are very few in this gene pool, has intimate practical knowledge as well as legal knowledge of the business, often understanding the business better than most of his/her clients. It is a unique melding of marketing practical knowledge and experience together with practical legal experience that may cause this individual to answer questions off the top of his or her head in five minutes that would take typical business lawyers five years to research…and, in which case, they would still probably not understand the “issues,” let alone the solutions.

For better or worse, the practices of the MLM industry have induced scores of pieces of legislation and regulatory control, such as pyramid statutes, MLM statutes, business opportunity, securities, FTC and postal regulation. Notwithstanding the success of the industry, there is always tension between the regulatory community and the MLM industry. Overzealous regulators and rogue operators guarantee that this state of affairs will always exist. Layer these issues with distributor relations and discipline, FDA, trademark, tax and international issues, and it is easy to see why this individual is probably the first person with whom you should establish a relationship and with whom you should grow, with that person as a trusted business advisor and member of your business team.

At a minimum, you would be totally premature to jump into the marketplace without a legal review by MLM legal counsel of the most basic of sales kit contents, whether they be in hard copy, CD-ROM or on the internet. Those basics include: representative agreement; policies and procedures; product brochures; marketing plan presentation; and various forms ranging from retail receipts to autoship to multiple owner applications, etc. Responding after the fact to regulatory agencies over deficient materials or answering distributor complaints for slipshod documentation is too little, too late…and too bad for the startup MLM business.

Your trademark—your life!

Picture living your life without a name. To some extent, you define yourself and your existence by your name. Obviously, you had no choice in choosing your name, but nevertheless, in the trademark sense, it is your branding for life. When others think of you, they think of your name, and vice-versa. Your choice of name for your MLM is equally important. Not only will you brand your business and product forever, but what may be worthless today will be your most valuable asset in years to come. Just ask Coca-Cola, Marlboro, Microsoft, Avon or Mary Kay. And so, this choice deserves special emphasis in the beginning. A trademark search by your MLM Lawyer is a must. To be told three years down the way that you must give up your name because you did not bother to conduct a trademark search would be a devastating blow to your business. Also, it is essential that the name that you choose will suit the expanding product or service offerings that will be coming down the pike. So, what’s in a name? Everything!

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 eleven, which is “success is never a sure thing, but opportunity is always guaranteed.” Look for more detailed “rules of engagement” in Part 2 and Part 3 of MLM Corporate Startup: Essentials. 

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All Articles, How to Start a Direct Sales Company

Jeffrey A. Babener | Founder, Babener & Associates

Jeffrey Babener is widely recognized as a leading legal counsel in the MLM and direct selling industry. His law firm, Babener and Associates, has,...

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