Franchises and Multi-Level Marketing 9

Are sales of franchises and business opportunities regulated in any way?

A number of states have instituted franchise and business opportunity laws. Fifteen states have laws that require franchisors to provide presale disclosures, known as "offering circulars," to potential purchasers. Thirteen of these state laws treat the sale of a franchise like the sale of a security. Twenty-three states have business opportunity laws. These laws usually require that companies give potential purchasers a presale disclosure document that has been filed with a designated state agency.

What is multilevel marketing?

Multilevel marketing (MLM—also called network marketing) is a way of distributing and selling products and services through a chain of independent distributors rather than through traditional retail outlets.

How does multilevel marketing work?

Each distributor has two basic jobs: (1) to sell the company's products or services and (2) to recruit more distributors to sell the company's products or services. Each new recruit a distributor brings into the organization is, in turn, encouraged to bring in his or her own recruits. The result is that an active distributor eventually develops a hierarchical substructure known as a downline that looks somewhat like an organization chart in a company with a lot of employees. Each distributor gets sales commissions on his or her own direct product sales. He or she also makes a commission on the sales of the distributors in their downline. There are also likely to be performance bonuses available for reaching certain sales levels. Since each distributor profits not only from his or her own sales but from sales of the downline, it is to the advantage of the distributor to guide and help those below to succeed.

How do people get paid in MLM companies?

Compensation plans vary from one MLM company to another, but typically distributors' commissions or margins (a discount off the list price) depend on their overall sales volume and the level they have achieved in the compensation plan structure. In some companies distributors earn a commission on their own sales (say, 20 percent) and a lesser commission on any sales made by people below them. They might make 7 percent on sales made by people they have recruited directly (level 1), 5 percent on sales made by the recruit's recruits (level 2), and so on. Thus if a level 3 recruit sold $50 worth of goods, she would make a $10.00 commission on the sale, the person immediately above her (the level 2 distributor in the chain and the one who directly recruited her) would make $3.50 commission on that sale, and the person at the top of the chain (the level 1 distributor) would make a $2.50 commission MLM Distributor Hierarchy.

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