Investigate before you invest!

If you're thinking of joining a network marketing company, you want to be sure you're making a wise decision.  After all you'll be devoting a great deal of time and energy to your new business, and you certainly don't want to see it all suddenly go up in smoke.

Here are some questions about the company you should get answers to:

How long have they been in business?

Hundreds of new network marketing companies start up every year. About 80% of them go out of business within their first two years. So even though someone may be touting the incredible “ground-floor” opportunity of their brand new company, you’re better off passing on it – unless you like taking risks. Look for a network marketing company that has made it past the two-year mark.

Are they financially solid?  

If the network marketing company you're looking at sells stock, it’s easy to find out their financial status. Go to http://www.sec.gov/edgar/searchedgar/companysearch.html. After you've put the company name in the search field, you'll see a long list of reports.  You're looking for the most recent quarterly report (10-Q) or annual report (10-K).  These reports might not make a lot of sense to you if you're like me and don't have a background in accounting, but you should be able to get the answers to the following questions: 

• What were their gross sales last year? 
• Are their sales increasing? 
• Is the company in debt, and if so, by how much?  
• Do they have cash reserves? 

If they're not publicly traded, try to get as much of this information as possible from the company. If they're not cooperative, this could be a red flag.

Don’t be swayed by what appear to be the lavish lifestyles of a network marketing company’s associates. The "rolling-in-dough" image may look appealing, but it's not necessarily a good indicator of the company's financial picture.

For example, I was with a network marketing company back in the 80’s that was growing like crazy.  All the top executives and associates were making obscene amounts of money and spending it like crazy – cars, houses, furs, and jewelry. The next year, product sales stopped expanding and started to decline.  Thanks to poor planning, the company had no reserve cash cushion to fall back on, couldn't pay their bills, and were soon out of business.  Along with all their distributors.

What kind of training does the company offer?
Nearly all network marketing companies offer some kind of training program. However, I’m sorry to say that most of those programs will not totally prepare you for succeeding in your business, and you will probably want to get as much outside training as you can.

(Have you checked out my "Basic Training" on this website yet?) 

Is this a “pyramid scheme”?

You’ve probably heard of pyramid schemes. Pyramid schemes are illegal, but some still sneak past federal regulators.

A pyramid scheme may have a similar compensation structure to a legitimate network marketing company – people sponsor other people who sponsor other people, and so on – but the difference is in the product. The product in a pyramid scheme, if there is one, is something of little inherent value – something no one would want to buy in and of itself. It’s only used to try and get around federal regulations that require a network marketing company to sell a legitimate product or service in order to be considered legal.

Pyramid schemes are really just in the business of moving money around, preferably into the pockets of the people on top.

Are their products unique and protected from imitators?

I can’t tell you how important it is for a network marketing company’s products to be either patented or proprietary (protected by trade secrets). To illustrate, I’ll tell you about another company I worked with back in the early 80’s. 

They were pioneers in the miniature trampoline business – they pretty much started the craze back then. Their product was the best – a welded steel frame that could get run over by a truck and not get bent; a bouncing surface made of Kevlar (the stuff bullet-proof vests are made of); the most durable springs in the industry; and… the highest price in the industry. For their first year, they were making gobs of money – it was a fun way to exercise and people loved them. 

And then a flood of cheap knock-offs hit the market, selling for a quarter of the price. The imitations were nowhere near as well-made as the original, but it was really hard to convince the buying public that it was worth paying more. 

So guess what? Right! The company went out of business in a very short time. I’m sure you can see the importance of being protected from competition.

Are the company’s products consumable?

This would include anything that gets used up on a regular basis. Consumable products mean repeat business from the same customers. It's pretty obvious why this is an advantage over products you only sell once. If you want to build substantial residual income (income that keeps coming in month after month regardless of what you are doing), doesn’t it make sense to pick a product or service that generates repeat sales, preferably every month?

Is the company committed to research and development?

This is important because it means you will be dealing with a growing line of new, patented and proprietary products. Some network marketing companies spend zip on R&D. Which kind of company would you rather work with?

Does the company drop-ship directly to your customers?

This may seem like a small thing, but it will turn out to be very important when you find yourself wasting a lot of time driving all over town making deliveries.