THE BIZOP NEWS

Kim Klaver has an interesting post about network marketing,

New School Network Marketing by Kim Klaver: "They don't want weasel words or fine print."

Hmm. Does that mean, when selling the business opportunity, that we should stop leading with the images of the guy in the Armani suit with the fancy sports car and big house?

And at the bottom of the page, in very small print, they get the weasel language (AKA disclaimer): Results not typical. Results depend entirely on your own efforts. Results not typical. Results not typical. Results not typical. Results not typical. Results not typical.Results not typical.Results not typical...

The proposed new FTC Business Opportunity Rule would take care of this problem in the following manner.

1. The picture of the "the guy in the Armani suit with the fancy sports car and big house" would be be an "earnings claims".

2. Since the income opportunity was making an earnings claim, no matter how much it cost to purchase the opportunity, would require the seller to give the purchaser a one or two page disclosure document.

3. Few sellers will realize this, and if there are sufficient complaints, the FTC will have the ability to shut down network marketing opportunities the same way that the close down business opportunity frauds.

Win/win.

Posted by michael webster at 6:15 AM | Permalink | Comments (0) | TrackBacks (0)

Whose on First At USANA? Over at Bloggingstocks, Zac writes"

"In just the past few months, Usana Health Sciences (NASDAQ: USNA) has had more scandals surrounding biographical errors than any company or organization that I can think of. Take a look:

Denis Waitley, a director at the company, decided not to stand for re-election after investigator Barry Minkow uncovered that the PhD listed in his biography came from a long-defunct diploma mill. He also does not possess a Master's degree, although one was reported in numerous SEC filings.

Dr. Timothy Wood, Vice President of Research and Development at the company, claimed to have a PhD in biology, but it's actually in forestry, which seems less relevant at a company that makes nutritional supplements.

Myron Wentz, the company's founder and Chairman, renounced his U.S. citizenship to "move" to the tax haven of Lichtenstein.

And now, according to the Wall Street Journal, Dr. Ladd McNamara has left the company's medical advisory board after it was discovered that he no longer has a medical license. A Usana spokesman said that McNamara surrendered his license in Georgia in 2004 in response to allegations that he improperly prescribed medication to a family member. He also agreed to a lifetime ban from practicing medicine in Ohio."

After awhile this casual attitude to the truth, and statements being made to the public, must start one to wonder just what else USANA is fibbing about? You cannot simply continue to have your board members either resign, not stand for re-election, because they have materially misrepresented who and what they are without the public beginning to wonder how much truth or not there is to your other statements.

Posted by michael webster at 9:46 PM | Permalink | Comments (6) | TrackBacks (0)

New School Network Marketing by Kim Klaver: Affirmations: delusions for sale?

The short answer is: never. Misrepresenting your income level to prospectives is actionable misleading advertising. It is called being a "shill". You have no reasonable basis for your earnings representation, and so you cannot "affirm" it to the public.

Affirmations are perfectly fine, indeed the ability to contract with your future self is a well known device.

The Nobel Prize winner, Thomas Schelling, contracted with himself to give up smoking. The contract device worked and Schelling gave up smoking.

Not all public affirmations of commitment will succeed. But there is a clear legal difference between an affirmation which is forward looking - I will make $10,000 a month and an affirmation which is not - I am making $10,000 a month.

The former cannot be relied upon, legally. While the latter could well be a representation forming the basis of a lawsuit for negligent misrepresentation.

It may be acceptable to trick yourself for reasons of self-improvement, but it is actionable to trick other people.

Posted by michael webster at 7:45 PM | Permalink | Comments (0) | TrackBacks (0)

A little over two years ago, Edward Teach wrote a nice little piece summarizing some of what we know about heuristics or rules of thumbs we use to make sense out of a confusing and contradictory world. Some of the experimental results appear to be quite odd.

For example, "Dan Ariely, professor of management science at MIT Sloan School of Management, conducted a mock auction with his MBA students. He asked students to write down the last two digits of their Social Security numbers, and then submit bids on such items as bottles of wine and chocolate. The half of the group with higher two-digit numbers bid "between 60 percent and 120 percent more" on the items, says Ariely." (my emphasis) Professor Ariely's webpage is here.

Anchoring on irrelevant or inaccurate data is prevalent. According to Ariely, "People don't know how much something is worth to them," he comments. An anchor helps them decide. Once a value is set, people are good at setting relative values, Ariely explains. But "it's very hard to figure out what the fundamental value of something is," he adds, whether it's an accounting system, a company's stock, or a CEO."

What does anchoring have to do with the new FTC Biz Op Rule?

Proposed section 437.4 c of the new FTC Biz Op Rule deals with the use of industry standards, such as the number of "vends per day". Business Opportunity sellers would not be able to use these statistics, unless the seller has "written substantiation that the industry standards are representative of the typical biz op purchaser." It is interesting that the FTC is alive to the abuse of this heuristic, but does not understand how the commitment heuristic will overwhelm the seven day cooling off period. We can only hope that the FTC will take the lead from California and publish the business opportunities disclosure documents.

Posted by michael webster at 6:56 AM | Permalink | Comments (0) | TrackBacks (0)

USANA is not only being scrutinized by the FDI. "USANA looks worse now" is Kim Klaver's conclusion after reviewing FDI's interview of some USANA recruits, her blog is at New School of Network Marketing by Kim Klaver.

Many of the commentators do not share Ms. Klaver's conclusion, viz. that it is wrong to emphasize to a prospect that they need to recruit.

Here is a sample of some of the comments.

"I have to laugh when I see these types of interviews. Especially the quote "Jane lost $5,000" Pity Barry Minkow didn't think it was important to qualify that statement! I guess when one is trying to make a compelling interview, one should never let the facts interfear with a good story.

May I suggest that Jane paid $5,000 and in return received $5,000 worth of a quality nutrutional supplements."

Obviously this commentator takes a broad view of fraud. To invest in a business opportunity and then be told you must have got value because you have some supplements in your closet.

"Yes, the opportunity is misrepresented. What is Jane's responsibility in this? What about due diligence?

There are two sides to the story. People fall victim to this because they are looking for a get rich quick scheme."

Here is another odd response. The commentator appears not to understand that the modern legal view is that if an income earning opportunity is mispresented to the public and that mispresentation is the cause of the loss, then reliance is not an element that needs to be proved. This makes sense, we don't require individuals to perform due diligence on the level of detecting fraud.

I believe that Ms. Klaver agrees in part with my analysis as she says:

"How would Jane know? How does anyone who has no business experience know to even DO due diligence? And remember the neighbor is doing it, too - so there's the added peer pressure.

That's why I wrote that they look like predators. Hitting on prey that are no match. Of course people SHOULD do due diligence. But many don't even know they should, until it's too late. They have no previous business experience."

This example is why the Direct Sellers Association ought get behind the FTC's Business Opportunity Rule so that they can point out, objectively, that the purchaser had the necessary information to perform due diligence.

Posted by michael webster at 11:14 AM | Permalink | Comments (0) | TrackBacks (0)

Barry Minkow and his researchers have brought to the forefront a number of serious issues which impact public companies which have network marketing as their business model.

Avon, Herbalife, Immunotech, Nu Skin, and Tupperware are public companies which use network marketing as the primary method of distributing their products.

Minkow and his researchers are asking a very simple question. If a public MLM company reports that it has X distributors working for it, then how do we calculate the value of this work force? We need to know the turnover rate of the distributors, how many are actually selling, and the average sales for each distributor, excluding their personal use.

USANA has reported that according to their internal survey, done 2 years ago, only 25% of its "distributors" actually join to sell the product. This should be of some concern, given the that the USANA website is largely devoted to expounding on the benefits of running a USANA business.

Importantly, for public disclosure, as Minkow in his response notes that "Moreover, this 75% statistic is found nowhere in Usana’s 10‐Ks or 10‐Qs, and has only been reintroduced because it appears to serve as a mitigating factor to failure and collapse rates that the company can no longer conceal based on the findings of our report. "

The USANA report is very important, even if it only comprised 48,000 distributors. We need to know exactly what questions were asked, the purpose of the survey, and whether other surveys of this nature were undertaken.

But taken on its face, USANA's admission that only 25% of its work forces is actually selling product is stunning. Imagine having a company in which only 25% of the workforce shows up to work.

If 75% of USANA's distributors are not selling product to customers, then why report them as distributors at all? Wouldn't the accurate figure be material to investors? Do analysts care about this material fact?

Well, at the recent conference call with analysts, Zac Bissionette reports "Fast-forward to Wednesday's conference call. Every question asked seemed to have a bullish slant, and assumed that the company was innocent. Questions centered around whether the company has seen an impact on sales from Minkow's report, and whether the company saw this as an opportunity to buy back more shares. I spoke with Barry Minkow about the conference call and he said, "I don't believe one thing they say" and also pointed out that "There was not one tough question allowed to be asked during the conference call."

Tracy Coenen has taken the trouble to illuminate in great detail her concerns about the entire USANA telephone conference with analysts. But, I would remain focussed on the essential question for all these public MLM companies: how many distributors do you have that are working at a business and how long on average do they work selling?

Posted by michael webster at 6:59 PM | Permalink | Comments (0) | TrackBacks (0)

In some ways, this an easy question. If a distributor simply lies about about how much they make to sell you the opportunity that is misleading. This recently seemed to happen over at pink truth, in which a Mary Kay distributor's claim of six figure income was shown to be inaccurate.

But in other cases, it is more difficult. Consider Nu Skin, for example.

In 1994, the FTC obtained an order against Nu Skin International which

"prohibits the respondents from misrepresenting the earnings, profits or sales of anyone participating in a sales or distribution plan. It also requires them to disclose clearly and conspicuously in conjunction with any future earnings claim they make both the average earnings of all distributors and the percentage of those distributors who actually achieved the claimed earnings." (my emphasis)

What does Nu Skin disclose about its business opportunity? From their website, we have the following:

While the disclaimer is useful, consider the last line. "The company currently provides neither an estimate of average income from retail sales nor includes distributor retail income in its average commission information."

Think about this. You are selling product, but your wholesaler doesn't know or won't tell you how much money that you will even gross by selling the product retail. What is the reason for this? "Distributors are free to set their own selling price and may personally consume some of the products they purchase." That isn't a reason not disclose or estimate how much money distributors make selling the product retail. Ask the distributor - "how much money did you make selling our product?" We might want to raise or lower our prices based upon perceived demand. Can you imagine that Coke has no idea or estimation about what its bottlers gross retail sales are? Or does McDonalds have no idea or estimate about how much its franchisees gross because some operators may actually eat at McDonalds?

Isn't it important to the FTC 1994 order to know how much of the Nu Skin product is never sold on a retail basis, but is left rotting in the distributor's basement or garage?

Obviously, people are not entering into this business opportunity because of the disclosure about earnings. If you don't know even an estimate of your gross earnings from retail sales, then what are you buying?

You are buying the right to have a commission stream, by selling others the right to have a commission stream. And how lucrative is that commission stream? Consider the following chart.

(Also, in order to read the chart, we have to know what the footnotes refer to. Can you read what is below? Because I cannot.)

The FTC order covered representations about earnings, profits or sales and required that average "earnings" be disclosed.

Clearly, this is not being done. The only disclosure is on the amount of commissions paid to "Active Distributors". As the chart indicates, "these figures do not represent a distributor's profit, as they do not consider expenses incurred by a distributor in promotion of his/her business and do not included retail mark-up income."

Second, notice the use of the term "Active Distributor". Only 35% of people who sign up as distributors actually sell product to another distributor; but only 16% of them actually earn a commission for doing so.

Third, we are not told how many "Active Distributors" remain active, on average and for how long.

Fourth, the average commission is over inflated because it refers only to a commission received by an "Active Distributor", or 35% of everyone who signs up to be a distributor.

Fifth, there is no meaningful disclosure of commissions in column three. The percentages add up to something around 15%, are we to infer that 85% of the other distributors received no commissions? Why isn't that clearly disclosed?

Six, column 4 has no real purpose, except to trick you into believing that there is 64% of making at least $4332.00 in commissions - not true, only a 64% chance if you are already at the executive level - which we don't know how long it takes on average to get to.

I don't understand how you could read this chart and meaningfully understand the promise of this business opportunity.

Posted by michael webster at 5:20 AM | Permalink | Comments (0) | TrackBacks (0)

Barry Minkow , and his team at Fraud Discovery, published a devastating critique of USANA as an illegal pyramid scheme. (Candid disclosure, I wrote an flattering article about the Fraud Discovery Institutes's due diligence, and in return Barry Minkow promised to buy me a beer if I was ever in San Diego.)

The Minkow Report is making waves over at Pink Truth: Facts, and the Wall Street Journal picked up the story, Usana Sales Plan Draws FireFrom Felon Turned Gumshoe.

Here is my summary of the report, but I urge readers to read the entire report and all 20 addendums and the lab report. There are 8 red flags, and 2 background observations.

Background - Why USANA's stock price might remain high despite not having a credible business model.

1. The float of the USANA stock makes it difficult or impossible for short sellers to borrow adequate stock. Thus, an essential feature of the market may not correct the price of USANA stock.
   
2. The executives of USANA have the incentive to keep the stock price high because their compensation is tied to the stock price. This doesn't mean that the senior executives are dishonest, only that their incentive is to keep the stock price high.

The 8 Red Flags, my summary.

1. Untenable Business Model - USANA claims in it advertising to potential distributors that in the traditional retail model, with national, regional and local distributors, costs 75% more than a networking model. Minkow describes this as "fairy tale" story. He argues that if the USANA model could save 75% of distributor's costs, then why are USANA's products much more costly than comparable retail products? How has the saving been passed on to the distributor and ultimately the consumer, asks Minkow ?
   
2. Material Non-Disclosure - The report questions why USANA represented to the FTC that the new business opportunity rule would "make it difficult, if not impossible for USANA to continue growing", but then told the SEC that the FTC's business opportunity rule might only "require USANA to change some of its pre-sale disclosure practices." Well, which is it? Disaster or some change in pre-sale disclosure?
   
3. Misrepresentation about Average Income - The USANA website reports that the average income of a distributor was $802.68. Minkow argues that this is misleading in two respects. First, the average is gross sales and not net income. Second, the reported average is too high because USANA only counts the distributors active in the last 3 months to calculate the denominator. Depending on the turnover rate, the average gross could be significantly less.
   
4. Misrepresentations about Business Opportunity -After attending a presentation at the Utah company's location and taping it, Minkow's team was told that the AG of Utah had endorsed the company. The AG's office denies this.
   
5. Endless Recruiting Chain - Minkow argues that USANA does not sell 70% of its products to consumers, and therefore should not be granted the safe harbour from illegal pyramid prosecution.
   
6. Unregistered Securities - In the opinion of Doug Brooks, the distributors purchases of the USANA business opportunity are unregistered investment contracts because the bulk of the distributor's success relies upon how well his recruits do recruiting. (I believe that at English law this is what gives rise to an unregistered lottery.)
   
7. Integrity of Owner - Minkow discovered that a previous majority owner had renounced his American citizenship, but his residence was not disclosed in the SEC filings. It now appears that majority owner is a company incorporated in the Isle of Man, with the sole corporate shareholder residing in Liechenstein..
   
8. Stock Trading Patterns - The company has purchased on the open market a large number of shares, while insiders sold at the same time.

According to the Wall Street Journal, USANA disputes these findings because although

"Mr. Minkow says the company's sales model is unsustainable because it requires the constant recruitment of new associates. Eventually, he argues, the company will run out of distributors, who will face long odds selling products or recruiting new disciples. Usana's major product, a multivitamin, is far more expensive than rivals.

As of the end of 2005, only 37% of Usana's associates had ever earned a commission, according to the company's latest figures. Among those who had been paid, the figures show, 87% didn't earn enough to cover the $116 they have to purchase or refer each month to qualify for commissions.

Usana says this kind of analysis misses the point. "The inherent goal isn't about coming in to, quote, break even," says Fred Cooper, the company's executive vice president of operations. Most associates are interested in purchasing the vitamins without commissions, Mr. Cooper says, and most distributors view what they can earn as a vitamin discount, not as a path to profits."

Well, I hazard the guess that if most if not all distributors aren't earning profits, they would view what they can earn as vitamin discount. But a discount from what,certainly not ordinary retail prices for vitamins.

Posted by michael webster at 9:44 AM | Permalink | Comments (6) | TrackBacks (1)

Over at one of my favourite analytical sites about network marketing, and Mary Kay in particular, has a fascinating discussion about churning Pink Truth: Churning New Recruits.

How Many Recruits?If I told you that Mary Kay had 700,000 independent consultants in the United States in 2006, this would seem like a fairly impressive number. Surely there must be some of them who are making a decent living from selling product?

How Many Recruits Stay? Well here is where it gets very interesting. According to Pinktruth:

"In 2006, Mary Kay disclosed that the company had over 700,000 independent beauty consultants in the United States. This was similar to the 2005 reported figure of 715,000 consultants in the United States. This implies that at the current time, the number of consultants is staying relatively stable. (i.e. For every consultant recruited, one drops out.)

Mary Kay stated in its response to the FTC's proposed Business Opportunity Rule, that there are 2,400,000 "disclosure opportunities" (meaning interviews) per year. That's 200,000 women interviewed per month. Mary Kay Cosmetics further stated that there are 40,000 new recruits per month. (Thank God those other 160,000 per month said no… a total of two million women per year who turn Mary Kay down.)

At 40,000 new recruits per month…

That means that during 2006, Mary Kay Inc. recruited 480,000 women in the United States, and 480,000 women in the United States quit. Add the 480,000 quitters to the 700,000 (or so) U.S. consultants on the books at the end of the year, and we've got a total of 1,180,000 (yes that's over 1 million) women in the United States who were "in" Mary Kay at some point during 2006.

What a staggering churn rate, though, isn't it? Depending upon how you look at it… 41% of the 1,180,000 involved during the year quit. Or of those 700,000 on the books at the end of the year, 69% of them will quit in the following year. 480,000 women churned and burned in 2006." (my emphasis)

Other Interesting StatisticsThere are some other interesting statistics that will become available when the FTC amends its Business Opportunity Rule to cover Network Marketing.

Section 437.1(e) will require the Network Marketing Opportunity Seller to disclose the number of cancellation or refund request in the past two years. This disclosure would have to be updated every quarter. It is required even if the Seller has no policy covering cancellations or refunds.

In Mary Kay, individuals can return part of their inventory within a year of joining Mary Kay. Many do not or simply sell their product on e-Bay. The new disclosure document makes the refund policy clear, before signing up, before the distributor meetings, and before a commitment is made. It will be interesting to have numbers to compare across different network marketing opportunities.

Posted by michael webster at 8:17 AM | Permalink | Comments (0) | TrackBacks (0)

Everyone asks, "how much money can I make investing in this franchise, distributorship or network marketing opportunity?"

Sometimes, as in the case of the Arbonne business opportunity, the answer is in plain sight. For anyone who has mastered grade 3 math.

Arbonne has an earnings claim on its website. This chart will tell you how much money you can reasonably expect to make on your Arbonne business from the sales of your staff or consultants.

Assume that you have an $8.00 hour job and are wondering whether you should supplement your income with part time work selling Arbonne products,

1. A consultant has a 1/100 chance of earning $200.00 per quarter, or $2 per quarter. It is reasonable to spend no more than 15 minutes per quarter on your Arbonne business, assuming your opportunity cost is $8.00 per hour.
2. Our consultant, after 5 months or $2.25 in earnings, gets promoted to district manager. A district manager has about a 2/100 chance of earning $875.00 per quarter, or $17.50 per quarter. It is reasonable to spend no more than 2.25 hours per quarter on your Arbonne business as a district manager.
3. A short year later, our consultant now progresses to area manager. How do things look now? An area manager has a chance of 1 /200 in making $4,600 per quarter, or $23 per quarter. It is reasonable to spend no more than 3 hours per quarter on your Arbonne business as an area manager.
4. It gets better. After two years, the consultant could progress all the way through the ranks to regional vice president. A regional vice president has a chance of 1/1000 of making $20,000 per quarter, or $20 per quarter. Backsliding, I see.
5. Finally, at the top position listed, the national vice president has a 4/10,000 chance of making $94,000 per quarter, or about $38. It would be reasonable to spend no more than 5 hours per quarter on your Arbonne business.

Definitely a part time business, if a business at all.

What do other consumer sites say about Arbonne's earnings claim?

Arbonne scam, a blog about Arbonne talks about the low chances of becoming a national vice president, but has no analysis of the earnings claim.

In the long thread at Quatloos, there is no mention of the earnings claim.

Over at scam.com, the thread on Arbonne, again, contains no analysis of Arbonne's own numbers.

Do people not care about their opportunity costs? You tell me.

Posted by michael webster at 10:16 AM | Permalink | Comments (0) | TrackBacks (1)

I am a pathetic devotee of Donald Trump's television show "The Apprentice", despite its declining ratings. Who doesn't secretly believe that they too could outperform the any of the contestants?

However, as fascinated as I remain with this television show, I regard Mr. Trump's endorsement of ACN with considerably more skepticism. "ACN reps are allowed to use this words to describe Trump's endorsement Donald Trump has agreed to endorse and promote ACN and our vision. He will be featured in a variety of print and video media over the coming months, all designed to help you build your ACN business. In addition, Mr. Trump will be speaking at select upcoming ACN International Training Events. Representatives are not allowed to use Mr. Trump's name, image, footage, website or any other material in any form at any time. ACN says that it will not tolerate any violation of this policy. If any representative is witnessed acting in a way that might compromise ACN's relationship with Mr. Trump, ACN should be contacted immediately. Consequences will be severe and may include deactivation." (my emphasis)

As I have written before, I doubt that ACN is a pyramid scam in the criminal sense of "pyramid". But I certainly don't think that it is a good business opportunity. Consider what was written at Sub-Board I, Inc.

"It's easy to get excited when someone tells you stories of living a life of luxury. But once you start asking questions and trying out ACN's suggested sales pitches on everyone in your phone book, it quickly becomes clear that what Lullo described on stage won't work for everyone.

He says the company sells phone services--long distance, local, DSL, etc. He says that for $500 you can buy into your dream job.

But once you wade through all the jargon, it's clear that what your $500 has purchased is the incentive to badger other people into giving Lullo's company $500 too.

No matter how many times Lullo and his disciples mention that the business was praised by Donald Trump, it doesn't change the basic dynamic. What you are really selling--the real product--is your friends. Your neighbors. Anyone you can drag into the company's embrace." (my emphasis)

What is the attraction to "buying your dream job for $500"? Well, it looks deceptively simple to succeed,

"It's not the commission that makes representatives money. It's the bonuses for recruiting and advancement within the first month that allows them to make their money back. When you sell seven phone points (one awarded for each service sold) and recruit two other people to pay $500 and become TTs below you with seven phone points each, you get named "Executive Team Trainer."

That position is still one quarter of one percent, but includes an exclusive, first month only, bonus check of $700. In other words, you've made back your $500 investment plus $200 that month." (my emphasis.)

Let's imagine a story in which all ACN reps quit with a profit of $200, after recruiting their two new sales representatives. So nobody loses. Right?

After you quit, ACN has $1500 - your bonus of $700, ie., $800, and your two recruits are busy looking for four more stooges, so that they can cash out for their $200. Then ACN would have the four stooges $2000 - your two recruits' bonus of $1400, another $600. Can the four stooges find eight more "independent sales representatives"? Well, then ACN would have the eight ISR's $4000 - the four stooges' bonus of $2800, or $1200. Do you sense a pattern here? For every "clever" ACN rep who decides to "retire" with his $200 bonus, ACN makes $300 of his or cleverness. Very nice.

Posted by michael webster at 1:03 PM | Permalink | Comments (0) | TrackBacks (0)

Lose your entire investment in business opportunities scams as outlined in the FTC's Project False Hopes, Bogus Business Opportunities. You won't have any money and therefore no money problems, by definition.

This type semantic trickery along with other deceitful advertising practices is the lifeblood of these scams. In this post, I want to analyze a recent vending fraud, show the correct due diligence -which is simple, but also explain who should be doing the due diligence.

Lifestyle Vending is alleged by the FTC to be a business opportunities fraud. The FTC has a civil case, and they have recommended that the Department of Justice also look into the allegations, from a criminal aspect. Here is a list of the recent criminal convictions in business opportunity frauds cases.

The FTC's complaint against Life Style Vending can be broke up into three main elements.

First, Life Style Vending is a type of business opportunity that the FTC regulates under the regulation known as the "Franchise Rule". The Franchise Rule has specific disclosures that must be made to the potential purchasers of the opportunity. Virtually, no investor thinks that they were buying a "franchise" and so it is not surprising that they or their lay advisors would not research this opportunity correctly.

Second, Life Style Vending made representations to the public about what they could expect to earn if they bought Life Style Vending's machines. For example, in a representative classified ad, the representation was that with 30 machines, one could earn potentially $50,000, yearly. No doubt Life Style Vending thought the semantic trickery of using "potential" saved them from making an outright lie. But, the Franchise Rule, or what it should be known as, the "Biz Op Rule", prevents sellers making earning claims without having a reasonable basis, which includes giving the name and number of individuals who have attained said earnings, and the percentages of distributors meeting or bettering that level of earnings.

Third, Life Style Vending did not provide purchasers with a basic disclosure document, a document which discloses much more about the opportunity, including a list of all the distributors of the vending machines.

So how could you have avoided this business opportunity scam?

Follow the four step program.

1. Identify in which states Life Style Vending placed its classified ads by googling its 800 number, 1 (800) 704-5414.
2. Locate all the states which require either business opportunity registration or franchise registration.
3. Write and obtain the required registration from all states in 1. which appear in 2. Don't worry about where you live, just see if the required registration is there.
4. If you get nothing from these state regulators, then you know that the opportunity is a business opportunity fraud. (If you do obtain the disclosure, you will have to take it to an experienced franchise attorney to evaluate it.)

Will this due diligence work? No. Not for the person hooked on the phantom dream presented by Life Style Vending. Cognitive dissonance will prevent new information from displacing the dream.

What can be done then? The four step program is for the advisors, friends, or spouses of the potential purchaser. Sometimes, these people have sufficient control over the purse strings to prevent a fraud. At the very least, they know how to evaluate a business opportunity. They do, now.

Technorati Tags: ftc, vending, due diligence, bogus business opportunities, criminal convictions, life style, scams, business opportunity, money problems, lifeblood, false hopes, department of justice, civil case, frauds

Posted by michael webster at 10:14 AM | Permalink | Comments (0) | TrackBacks (0)

For a number of years, Tupperware distributors were explicitly regulated as franchisees. Tupperware filed for the available exemptions, so that their UFOC is not available online. But there is doubt that, until 2004, Tupperware treated its distributors as franchisees, read the 2004 franchise exemption letter here.

I had a recent post about whether Mary Kay Directors were buying a franchise, as it is defined by the Federal Trade Commission, and I posted a comment to that effect.

The responses to me question about Pink Truth: Directors as Franchises are collected below, along with my response.

Comment 1:

"Micheal Webster

Maybe that is why in all these years the one thing that stays at such a low price is the starter kit----because they are trying to stay below the radar of FTC---less than $500, so that we are not considered a 'franchise'.

Most of the women on this site are BRILLIANT and I am still reeling at the vast amount of collective brainpower here.

I am much less business savy----BUT something about the $100 changing hands at the point of 'commitment'-----like "earnest money" in a real estate transaction.has always bothered me. It is not like the Starter kit is VITAL to our success----since the contents of this kit have changed COMPLETELY through the years----to now mainly just being a few tapes, some samples and a little product.

For some reason which I cannot figure out , it seems more like they need this $100 to comply with some kind of law----.or to make our CONTRACT BINDING----since maybe without the $$$--we could not be HELD to the contract. I don't know----just a thought.

Suzy Q.awesome piece and thanks for telling the truth-----that sure covers the last of the questions I had about what i was doing to make my director mad unintentionally."

Response 1:

I think that you are right. Mary Kay, along with other DSA members, seemed to focus on the low entry costs in their response to the FTC. I was not entirely persuaded by this type of reasoning as it ignored the high cost of being distributor or director.

Comment 2:

"Michael I also read your website with interest. I also wonder why people sitting with frontloaded prodcut aren't franchises. I've read several stories on this site and others where people are sending back upwards of $5,000 worth of product. That would seem like a "significant" amount in my book. But maybe I'm just cheap.

I've been thinking about this column since I read it. I couldn't stand the daily pressure of living like this, pink fog or not. How do you keep your sanity for goodness sake? I'd be a basket case before ending DIQ I'm afraid. There's no way I could handle this constant pressure day after day after day. Ridiculous to put yourself and your family in this much turmoil. IMHO, no amount of money would be worth that."

Response 2:

I also wonder if the FTC is persuaded that since the consultant or distributor can send back the product, for up to a year, whether there is a need for the FTC to assume jurisdiction. But it would appear that the new consultant or distributor would need to know just how many people in their position get stuck with unusable inventory after the year is up.

Comment 3:

"With a genuine franchise or exclusive distributorship, there is usually a lot of pre-screening to make sure you are ready for it.

McD's for example, requires you to have $200,000 and spend time at their headquarters learning how to run the business … RUN the business, not "work" it. And they do a lot of coaching the first few years because they don't make money unkless you sell product.

MK is not a franchise … it's a 'direct sales' business with 'multi-level comission structure'. Everybody buys from MK, but there are comissions based on your recruits."

Response 3:

I think that this is just a misconception about what a franchise is. McDonalds may do intense pre-screening, but that is far from the norm. To determine whether the Mary Kay director's opportunity is a franchise, you have to analyze the definition. For example, most people would be surprised to know that many vending opportunities fit the franchise definition.

Comment 4:

"Typically, franchises are little more particular about saturation of the market. My insurance business is a franchise. They would NEVER allow as many of us to be around as MK does. They are way too protective of their name and the likelihood of failure of the franchisees"

Response 4:

Again, encroachment is a very hot topic in the franchise world. Most of quick service restaurants give their franchisee no territorial protection.

Thanks again to all those who responded to my post. If you have further questions, you can post them here as comments or back on the Pink Truth website.

Posted by michael webster at 11:26 AM | Permalink | Comments (0) | TrackBacks (0)

Pink Truth: Update Regarding FTC Proposed Rule-Making Activities

provides an interesting update on what Mary Kay has been doing with respect to the new FTC Rule.

Apparently, Mary Kay is complaining that "However, the FTC has cast its net so broadly that it could include Mary Kay and other legitimate direct selling companies. Unfortunately, the rule as it is currently proposed could impose requirements on legitimate direct selling companies that would be very burdensome. While we support the government's effort to protect consumers from business opportunity frauds such as envelope stuffing schemes, we want to ensure their efforts do not harm legitimate direct selling businesses, such as Mary Kay."

Frankly, I have never really understood why in some cases Mary Kay isn't regulated as a franchise anyways.

Let's look at the FTC definition of a franchise.

"Traditional Franchises": There are three definitional prerequisites to coverage of a business-format or product franchise (Parts 436.2(a)(1)(i) and (2)):

1. Trademark: The franchisor offers the right to distribute goods or services that bear the franchisor's trademark, service mark, trade name, advertising or other commercial symbol.

2. Significant Control or Assistance: The franchisor exercises significant control over, or offers significant assistance in, the franchisee's method of operation.

3. Required Payment: The franchisee is required to make any payment to the franchisor or an affiliate, or a commitment to make a payment, as a condition of obtaining the franchise or commencing operations. (NOTE: There is an exemption from coverage for required payments of less than $500 within six months of the commencement of the franchise (Part 436.2(a)(3)(iii)).

A Mary Kay distributor is selling trademarked products, but is Mary Kay exercising significant control or offering significant assistance to the distributor?

Well, I would argue that there is certainly the offer of significant assistance to the distributor. There are marketing plans, marketing meetings, and promotional plans put in place to assist the distributor.

The only element which might be tricky is the "required payment". For some consultants, who start up with a small inventory, they would not qualify. But what about those people who are pressured by their national sales director to load up on $2,000 or $3,000 worth of inventory to start?

Does this inventory loading qualify as a "a condition of commencing operations"? Is is a requirement? What if the Mary Kay consultant truly believes that she had no other choice but to load up and spend more than $500? Would that make it a requirement? I have never seen an answer to this question in the FTC's staff advisory opinions regarding the FTC Rule.

Posted by michael webster at 11:33 AM | Permalink | Comments (0) | TrackBacks (1)

Over at scam.com, there was an enlightening thread about Strategic Reseach Network, and its associated company Health Career Agents.

The longest thread was about Strategic Research Network.

Many of the posters recommended that individuals contact either the BBB or SEC.

What was surprising is that given reasonably in depth understanding of this business opportunity, virtually none of the posters were able to identify even one of the correct regulators, whose attention may engaged by this business opportunity.

Here are some cites from its website:

'Complete Training and Support

As an Owner/Operator we provide you with complete training and support. Sharing the secrets we've developed in using the agent approach to maximize the number of healthcare practitioner placements you can make.

Owner/Operators make an investment of $34,900 in starting their business. In exchange they receive:

Thirty days of remote training where Owners learn healthcare recruiting process, are educated on terms, specialties and procedures, and how to use our various software tools.

Two days of on-site training where we provide Owners with the training we feel needs to be delivered in person.

Detailed 90 Day Start-Up Plan that outlines what an Owner needs to do, everyday, to get their business up and running.

Four days of hands-on instruction at our training offices with the experienced recruiters on our staff.

Technology solutions (worth more than $20,000) including research software, email tracking tools, candidate management software, and healthcare news clipping software.

Website development, logo design, starter marketing material.

A PC with all software pre-loaded.

Ongoing healthcare recruiting support and assistance in making placements for the life of your business.

Ability to send ten Sales Consultants through training at no cost.

Revenue from your sales Consultant efforts as you build your organization.

Access to the Global Database to conduct shared placements with other Owners.

Ongoing supplemental training.

You are able to start out full-time or part-time, whichever you prefer, and your overhead costs -for a phone, fax, and high-speed internet connection - will be insignificant relative to your income potential.

More than anything, for their $34,900 investment Owner/Operators get a business with legitimate six-figure earning capacity and the flexibility to structure it around their life.'

This is the classic business opportunity franchise: but the website both promotes earnings claims, and the denies that you should be able to rely upon them.

I do not know whether the software and training is worth the $35k; but the seller of this business opportunity clearly does not understand that you cannot entice people into buying this type of opportunity by making representations about earnings levels, and then saying:

'IMPORTANT: There are no guarantees of income or income claims made by Health Career Agents. This or any other business endeavor involves risk. Health Career Agents does not receive financial records or reports from its Owner/Operators and does not track or make claims as to the percentage of Owners who succeed or fail. One should be thorough and patient in considering an affiliation with Health Career Agents as an OwnerOperator.'

Either do not make an earning's claim, or back it up with reasonable estimates. Health Career Agents is trying to have it both ways, which would generally offend most franchise and business opportunity seller disclosure laws.

Posted by michael webster at 4:33 PM | Permalink | Comments (0) | TrackBacks (1)

Give your prospects a free lunch, and then pitch them for 6-8 hours on your product which doesn't work.

At least that is is what Office of the Illinois Attorney General who sued two Utah Companies for Misleading Promises is alleging. According to the press release,

"StoresOnline and Galaxy Mall both promise to provide everything consumers need to get an online business started, including software to set up a web page, access to online payment mechanisms, and training courses to pull it all together. But, according to Madigan's complaint, once consumers pay thousands of dollars for these services, the two businesses fail to fulfill their promises, leaving consumers with nothing.

Madigan's complaint specifically alleges that StoresOnline and Galaxy Mall, both based in Orem, Utah, lure Illinois consumers to a free lunch, where they encourage consumers to attend a "training session" to learn how to start a successful online business. However, the "training session", for which consumers pay a nominal fee, actually is a 6 to 8-hour sales presentation for the defendants' products. During the "training session", the defendants allegedly promise consumers:

*

that the products are easy to use and consumers will not need computer experience;

*

that the contracts for the products provide for a three-day period during which consumers can cancel the contract and obtain a refund; and

*

that the defendants will provide any assistance the consumers may need to start their online businesses.

In contrast to the sales pitch, the complaint alleges that:

*

the products are not easy to use, and even consumers with computer experience were not able to set up their online stores;

*

the defendants refused to cancel contracts and provide refunds, even when consumers attempted to cancel within the first three days; and

*

the defendants failed to provide the promised technical support for the products"

Apparently, 15 Illinois residents losts a total of around $90,000.

While I applaud the AG for brining this action quickly, I don't have the same applause for her preventive warning. "Consumers need to be very skeptical of any marketing efforts that promise easy access to the world of internet business," Madigan said. "If a sales pitch sounds too good to be true, it probably is. Consumers must be wary of unscrupulous businesses that prey on the desire to attain easy wealth through the internet."

These residents didn't find the sales pitch too good to be true, and in general scams do not self-announce themselves as too good to be true. So why didn't these individuals see through the deception? We don't know. We do know a couple of things, however.

First, it is unlikely that these individuals were very conversant with the internet. Had they googled "storesonline scam" they would have found the June 2005 warning from Australia, which raised serious doubts about the concept. Concluding, "Regrettably, instant wealth without effort is outside the reach of us mortals." In other words, at the free lunch, when you are promised something for nothing, having another helping of food, but leave quickly.

Second, we know that these individuals probably didn't pay for their online store with Visa or Mastercard, since they would have been able to charge back the purchase.

(Ironically, Ed Magedson of Ripoff Report fame, wrote a long piece explaining what a wonderful company Galaxy Mall was and how they had changed their spots.)

Technorati Tags: illinois consumers, galaxy mall, free lunch, storesonline, orem utah, madigan, training session, promises, illinois attorney general, utah companies, payment mechanisms, successful online business, set up a web page, thousands of dollars, prospects

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Multi Level Marketers warn that "In its present form, the FTC's proposed regulation would be devastating, if not fatal, to the direct sales industry," says Keith B. Laggos, publisher of Network Marketing Business Journal, who also warns the change could drive the entire U.S. economy downward into a recession., according to David Wilkening's article Will the proposed FTC multilevel marketing rules crash Tupperware's party?

Tupperware is an odd candidate for inclusion in this article.

Why? Well, for many years Tupperware sold exclusive territories to its distributors and was regulated as a franchisor. The sale of exclusive territories, along with the right to sell a name brand, brought it within the jurisdiction of the FTC's Franchise Rule.

As a franchisor, Tupperware had a very high level of disclosure obligation - much higher and costlier than what is being proposed by the FTC for Business Opportunities. Tupperware is also a public company, with its own costly disclosure and controls. The proposed FTC rule should not cause them any serious extra expense.

As discussed at the Pink Truth, the disclosure requirements by the FTC may not do anything to alleviate some of the relationship issues sales consultants have with Mary Kay, for example. Sales consultants apparently are being urged to pay up to $5,400 to for their start up inventory. Several experienced Mary Kay sales woman believe that this is far too high an inventory level to start with.

But there is something else odd here: if a sales consultant spends more than $500 in six months for the right to sell a name brand product, and there is the offer of significant assistance to the sales consultant from Mary Kay, then prima facie Mary Kay is selling franchises and its sales directors are franchise brokers, unless the a purchase of inventory at wholesale prices.

How, for the purposes of the FTC Rule, does one determine what the wholesale price is of a product which is never sold in a retail store? Is Mary Kay giving its product at their cost to its sales consultants? Doubtful, so how much of a $5,400 “full Mary Kay” store might be considered a franchise fee, for the right to sell Mary Kay products?

What is the rationale for requiring the franchise fee to be greater than $500? The FTC described the rationale this way. 'The record supports the proposition that the rule should focus upon those franchisees who have made a personally significant monetary investment and who cannot extricate themselves from the unsatisfactory relationship without suffering a financial setback. Implicit in the concept of franchising, as viewed by the Commission, is the assumption of a financial risk by a franchisee in entering into a franchise relationship.'

Well, if you have $5,400 worth of stock that you find out that you cannot sell, and a disclosure document might have revealed that 90% of sales consultants were in the same boat, isn't this a significant monetary investment that the FTC should be protecting? Why wait for Spring, regulate now.

Posted by michael webster at 8:10 AM | Permalink | Comments (0) | TrackBacks (0)

In a very interesting story, Charles Duhigg wrote, on November 13th, 2006 in the The New York Times about Why Short Sellers Want to Crash the Tupperware Party. The story was repeated at Kim Klaver's Network Marketing Blog and also at Ty Tribble's MLM Blog.

Mr. Duhigg reports that a number of short sellers are apparently betting that the FTC Business Opportunity Rule will become law and the resulting disclosure requirements will cramp recruiting.

"Analysts say the companies' real concern is that the new rules will undermine their ability to attract new sales representatives.

"If companies have to tell recruits that the average income is only $1,400 instead of the $50,000 advertised on their Web site, or that the average salesman only lasts two months, a lot fewer people are going to sign up," said Mimi Sokolowski, an analyst with Sidoti & Company who follows Tupperware Brands, Nu Skin Enterprises and other publicly traded multilevel marketing companies. She said that if the proposed rules pass without modification, recruitment in the United States could fall by as much as 40 percent."

The full story is a bit more complicated. Take for example Tupperware. For at least seven or eight years, Tupperware was regulated as a franchise in the United States, which required considerably more disclosure than the FTC wants with the new business opportunity rule. So, you would think that Tupperware's recruiting stock would improve with the more minimal business opportunity disclosure.

But Tupperware has been losing its sales force, according to its SEC filings, for almost five years in North America. Tupperware has simply failed to convince the public that their product is worth more than the plastic from the local dollar store, in my opinion. This accounts for their failure in North America better than the possibility of a new disclosure obligation.

Technorati Tags: multilevel marketing companies, tupperware party, network marketing, kim klaver

Posted by michael webster at 9:53 PM | Permalink | Comments (0) | TrackBacks (0)

In any distributorship, franchise, or network marketing business opportunity the question of encroachment, or “stealing customers” is a hot topic.

Over at Pink Truth, How to recruit the customers of other Mary Kay consultants there is a discussion about this topic which has attracted a good deal of discussion.

The basic problem any sales force faces is how to grant sales territories. Should they be exclusive, semi-exclusive, or completely wide open.

While competition for sales from other concepts is just that, competition from your own franchisor, distributor or other sales consultants is seen as much different.

We will accept competition, but not from our family members.

The FTC Rule on Business Opportunities, section 437.5(n), is useful to read. This section would prohibit misrepresentations made directly by the seller or through a third party about the terms of the territory offered to a prospective purchaser.

As was pointed out, Mary Kay’s sales contract includes the following term: “Customer names and addresses furnished by Beauty Consultant to Company in connection with optional programs shall remain the sole property of Beauty Consultant and will not be used by Company or disclosed by Company to other parties without Beauty Consultant’s permission, except as may be required by law.”

This would appear to make it clear that a consultant need not worry about having her customers poached by another consultant, unless of course the customer name was not furnished by the consultant to Mary Kay “in connection with [an] optional program”. Is this deceptive? I don’t know.

But, in any event, it is apparent that the Mary Kay network marketers need the protection of section 437.5(n) to properly evaluate both the opportunity and ongoing compliance with their sales contract.

Posted by michael webster at 10:33 AM | Permalink | Comments (0) | TrackBacks (0)

If the FTC's new proposed Business Opportunities Rule becomes a Rule, then all you will know about such direct sellers as Mary Kay will become available in a two page disclosure document.

But as reported on Pink Truth: The blog formerly known as Mary Kay Sucks Mary Kay's General Counsel wrote an extensive letter to the FTC in opposition to the proposed Business Opportunities Rule.

The letter opposing the FTC's reform of the Franchise Rule can be read here.

The basic gist of Mary Kay's opposition to the new disclosure requirements is this: 1) we are a reputable company with our own internal consumer protection scheme, Reputation, and 2) the proposed disclosure would be costly, Cost.

Mary Kay, like many other direct sellers and franchisors, however completely fail to understand the relation between Reputation and Cost. Let us suppose, despite the withering attack by Pink Truth on Mary Kay's claim to honesty and integrity in its dealings with its sales force, that Mary Kay represents the high water of integrity.

Should Mary Kay have to disclose its high character to potential recruits, if that disclosure is costly -assuming as we have done that they are of the highest rank?

Well, the answer is yes. This surprising inference is due to what economists call the "market for lemons". As Steven Woda wrote in a different context about eBay resellers, credible signals of reputation have to have teeth and must be costly to maintain.

If Mark Kay was on the direct seller, with no new entrants on the horizon, then the case for mandatory disclosure is weaker. But Mary Kay and the other direct sellers have the reputation of the direct market selling industry to maintain, as will as their own individual reputation.

In the new world of speedy access to bad facts, in which sites like Fighting Fatigue, and Up Your Cadillac, along with other general network marketing sites such as Falseprofits are asking difficult questions, Mary Kay would be foolish not to adopt the FTC's new regulation with gusto and indeed improve upon it.

Posted by michael webster at 10:33 AM | Permalink | Comments (0) | TrackBacks (0)

Here is a very cute picture demonstrating what the new FTC Business Opportunity Rule is designed to prevent,see

MLM Today: Eight Common Phrases

Technorati Tags: common phrases, cute picture, business opportunity, ftc, mlm

Posted by michael webster at 2:29 PM | Permalink | Comments (0) | TrackBacks (0)

Net Based Business Opportunities: Are They Just Flop-Oportunities? After a diet of steady skepticism, it is easy to believe that virtually no internet based opportunity exists, unless it is a scam or a fraud. But consider carefully the warning by the FTC, in this brochure:

However, the Federal Trade Commission (FTC) says that many of these business opportunities are scams that promise more than they can possibly deliver.

The scam artists lure would-be entrepreneurs with false promises of big earnings for little effort. They pitch their fraudulent offerings on the Web; in e-mail solicitations; through infomercials, classified ads and newspaper and magazine "advertorials"; and in flyers, telemarketing pitches, seminars, and direct-mail solicitations." (my emphasis)

This is the critical element of a scam or fraud: the promise of something for nothing, or for very little effort. If there is just one due diligence method you learn, internalize this one. When you come across a business opportunity: are you being told that a) this is something anyone can do, b) the profits are locked in or guaranteed, and c) it is easy. Just something for nothing: perpetual motion machines don't exist and neither do perpetual money machines.

Technorati Tags: mail solicitations, business promoters, ftc, false promises, business opportunities, internet access, scam artists, infomercials, kiosks, skepticism, pitches, internet based, scams, telemarketing, flyers, federal trade commission

Posted by michael webster at 10:50 AM | Permalink | Comments (0) | TrackBacks (0)

The FTC has a talking frog on one of its Business Opportunities webpages. This is one of the web pages that you would go to, if the FTC's new Business Opportunity Rule is passed for advice about due diligence.

What does the talking frog do? How does this mythical beast endow ordinary humanity with powers of investigation?

The FTC's talking frog advises a princess. Various of her courtiers are bringing her business opportunities for her appraisal. The frog provides a single word of commentary: "ribbet" which sounds like "rip-off". It is unclear whether the frog is analyzing the business opportunities, or is simply being a frog coincidentally coming to a "conclusion" that is correct. The Clever Hans effect. (Clever Hans refers to a horse which could apparently add.)

So the FTC's line of defence is: the appropriate way to tell whether a work at home business opportunity, a networking opportunity, or some other business opportunity is a "rip-off" is to listenly closely to the advice of a magical frog - who also completes his transformation into prince when kissed.

The FTC site would be laughable, except for it reveals a dark truth about the regulators: they really do believe that identifying and avoiding a business opportunity fraud is easy and straightforward -which I suppose it might be in a land equipped with talking frogs. This is why the regulators treat victims of commercial fraud with barely concealed contempt: you should have just consulted the talking frog, or the parrot which chimes "too good to be true, too good to be to true", in order to have avoided being a victim. No group of victims of crimes are treated with less respect that those victimized by con criminals.

Technorati Tags: frog, work at home business opportunity, ftc, clever hans, business opportunities, mythical beast, due diligence, apparently, work at home business, new business, networking opportunity, line of defence, webpages, princess, conclusion

Posted by michael webster at 6:23 PM | Permalink | Comments (0) | TrackBacks (0)