Don't get scammed by MLM promises this holiday season!

Edrie Pfeiffer
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Edrie Pfeiffer, Bankruptcy & Divorce Attorney

The holidays are fast approaching, along with plenty of stress about your financial situation (there's a reason bankruptcy filings tend to jump in January). This is the time of year when many people begin looking for a few ways to make extra cash, whether by mowing a few lawns for your neighbors, picking up extra shifts at work, or even taking a job working retail at night. But for a large group of people, particularly salaried employees and stay-at-home moms, these options are not feasible. While searching for ways to make money from home, many of these people will come across multi-level marketing companies, which hype up their ability to improve your life by giving you suplemental income while sitting on your couch or bed. 

You have probably been invited to one of those home parties for some type of product, maybe jewelry, kitchen supplies, clothing, or even lingerie. You know that if you go, you will be pressured to buy something. You will probably also be recruited to either host a party or become a salesperson for the company. In many cases, you will be told that you can make lots of money by signing on as an “independent consultant”, “sales professional” or “business owner”. All you have to do is recruit others to join the company under you, and purchase similar product like you did. You will have an “amazing opportunity to become financially independent by supplementing your income with almost no work!

 It sounds so easy to supplement your income through this type of program but please beware: many of these MLM (multi-level marketing) businesses are scams. A recent news article caught my attention: it was about a popular clothing company that sells women's leggings. They claim to be helping women build their own businesses and establish financial independence, all while staying home with their kids or allowing them to quit a job they don't like. The problem is that many of the women who bought into this company are now coming forward to accuse the company of pushing them into bankruptcy. By forcing them to keep buying product (alledgedly so they can sell more product and recruit more consultants, of course), these ladies poured hundreds of thousands of dollars into their "business". When they were unable to sell the product, the company refused to support them or take back the product. They were stuck with mountains of debt and piles of clothes, when all they wanted was financial freedom and the dream of  running their own business. Bankruptcy was the only option for many of these women, since the parent company was unresponsive to the issue. 

While this is an extreme situation, and plenty of women are running successful businesses without filing bankruptcy, the sinister nature of many MLM companies will undoubtedly cause more bankrupties down the road. There are many excellent companies that operate with independent sales people who either sell products through home parties or directly to consumers. Mary Kay Cosmetics, Rodan and Fields skincare, and Pampered Chef have been around for years and operate (legitimately) under this type of structure. However for every legitimate business, there is always someone who promotes a similar type of program that is not legitimate. The names of these companies change from year to year, but the premise is the same. While Mary Kay, R+F, and Pampered Chef focus on selling the product (with recruiting new salespeople as a side benefit), many of the scam companies have little focus on selling the product and huge emphasis on the money to be made by recruiting others into the program.

Any program that has a focus on making money by recruiting others into the program is doomed to fail. Did you know that if you were to get involved in such a pyramid program, that encourages individuals to recruit just 6 other people, by level 13 the number of people that would need to be recruited would exceed the world’s population. Since you would almost certainly be joining the program at a level well below the top of the pyramid, there is little chance that you would be able to recruit enough levels below you for the program to be successful. No one wants to end up in bankruptcy because of a business scam that bottomed out.

If you have been approached by someone about joining a home based sales program, use these tips to check out if it is legitimate.

  1. Are you asked to make a large investment in products to join? You may find that it is impossible to resell these products to recoup your investment.
  2. Is the emphasis on selling the products, or recruiting other sales persons? A legitimate company will have an emphasis on selling the product.
  3. Are the products priced similarly to like products? While there may be a market for high end products, if the price is much higher than similar products, you may find yourself out of pocket for these items.
  4. Are the products something that will have repeat buyers? If you have to constantly find new buyers, you will run out of buyers eventually. 

Like any situation, if it sounds too good to be true, it probably is. Any type of successful business will take effort to grow. If someone promises that you can get rich while only working a couple of hours a week if you buy this entry package and then recruit some of your friends to also buy in, don’t do it. If you invest in this type of company, you could end up losing money and looking at bankruptcy as your only way out of a bad situation.

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