When is a Mary Kay IB Consultant a Franchisee?
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There are two discussions about the amount of inventory an Independent Business Consultant for Mary Kay needs to start their home business.
The first discussion about initial inventory is at Pink Truth and the second is at Franchise Pick.
Unfortunately, neither article explores the legal significance of having to buy a more than $500 of inventory in order to use the Mary Kay trademark and begin selling as an Independent Business Consultant.
The purpose of this article is to explain the legal significance of the initial purchase of inventory and the legal protection for a product distribution franchisee.
PRODUCT DISTRIBUTION FRANCHISES
The significance of the initial purchase price is that you may be buying a product distribution franchise, which has set of legal protections not found in a simple network marketing distributorship.
Most people immediately think of the business-format franchise, like Subway or MacDonalds, when they think of a franchise. While it is true, these are franchises, business-format franchises are not the only legal type of franchises.
Product distribution schemes which involve the right to sell goods that are trademarked may also turn out to be franchises. And, the purchase is entitled to full disclosure of material information before the purchase.
(One such product distribution franchise, which is also a network marketing scheme, is Tupperware, which up to around 2003 routinely filed its franchise disclosure documents with the registrants states.)
Simply put, if you pay more than $500 for the right to market items which have a trademark associated with it, and are offered significant assistance in the way that you market the goods, you may have bought a franchise.
One critical element of the definition of a product distribution franchise involves the initial fee: under $500, and you are not a product distribution franchise.
Since the IBC for Mary Kay is clearing buying a opportunity to selling goods with a trademark, it is critical to examine the initial purchase of inventory to determine whether the network marketing opportunity is a product distribution franchise.
PINK TRUTH ON INITIAL INVENTORY LEVELS: 5K PURCHASE
Tracy writes:
"The greed exhibited by directors and national sales directors in Mary Kay Cosmetics is insane.
How this company can continue to pretend to "enrich women's lives" is beyond me.
There is now an even bigger push than ever for recruiters to get consultants to buy the largest inventory packages in Mary Kay history.
$4,800 wholesale is being promoted as "not even a full store."
The reality is that Mary Kay "stores" should be smaller than ever. Technology has made it so that products can be received in 3 days from Mary Kay Inc.
Let the company warehouse the products, and only order them when absolutely needed. Plus, with the rapid changes in products, having smaller inventory should be a goal for all consultants and directors."
FRANCHISE PICK ON INVENTORY LEVELS
Sean Kelly writes Mary Kay inventory purchases:
"Also, at the time of recruitment, there are many stories of new consultants being required to but inventory.
Of course, this sounds perfectly legitimate - how else do you sell cosmetics if you don't have any stock?
However, there are a lot of reports of pushy directors who try and get their new recruits to but the largest package of stock ($4,800 worth) rather than the minimum $600 package.
Presumably, this is because they then earn a much bigger commission cheque?"
FTC STAFF ADVISORY ON INITIAL PURCHASE PRICE
The initial starter kit for a Mary Kay IBC, I believe, is less than $50. Which clearly would rule out Mary Kay IBC being a product distribution franchise.
Or would it?
The critical legal concept is this: is a Mary Kay IBC required to buy more than $500 of inventory, calculated at bone fide wholesale prices to start her IBC?
The FTC Staff Advisory Opinion 95-10 addresses this issue in relationship to vending machines:
"The Minimum Payment Requirement does not include payments to the franchisor which are not required (either by express obligation or practical necessity) to obtain the franchise or begin operation of the outlet.
If the franchisee pays the franchisors for goods or services which are simply "optional," such payments are not included in the [minimum payment] provision.
43 Fed. Reg. at 59703.
The question remains, however, whether any additional machine purchases are really "optional."
Such determinations are fact-specific. Commission staff will make its own determination, based upon the particular facts, whether the investor is obligated to purchase additional machines or must do so as a practical necessity."
So if Tracy and Sean are correct about the practical necessity about buying more than $500 of inventory, then many Mary Kay IBCs have bought a product distribution franchise.
As such, the Mary Kay IBC, and many other IBCs, would be entitled to the protection of the FTC Franchise Rule.
Our next post will explain the significance of the this legal protection.
Comments
The initial purchase fee exemption from the Franchise Rule is a tricky one. But, yes if the IBC's were required to purchase excessive inventory, they would be entitled under the FTC Franchise Rule to the full franchise disclosure.
Posted by: michael webster
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July 28, 2008 10:09 PM
I am awaiting the next post with bated breath, especially since the MLM I used to be involved with (Cookie Lee) has a sign-up option that requires an initial purchase of $500 "wholesale."
Does this mean that the consultants/IBCs, if considered franchisees, have legal access to corporate company financials? Would they then be able to see how much they're really "NOT" making instead of the fixation that they are making 50% profit?
What was your take on the Weekenders Global demise?
Posted by: Fashion Paramedic | July 23, 2008 10:27 PM