Franchise, startup or mlm?

Franchise, Start Up or MLM? Ask These Questions Before You Buy

Dreaming of Being Your Own Boss?

You’ve heard the song,  “Take this job and shove it!”  It has always been the battle cry of new business in America.  According to a CNN/Gallop poll,  approximately 70% of all Americans say they would like to own a business.  However,  when you consider the number of all new businesses including low cost direct sales companies,  network marketing and multi-level-marketing companies, less than 15% of our population ever venture out to become business owners.

Sadly,  Americans are not overwhelmingly risk takers,  even when considering the low cost,  low risk MLM alternative to buying a franchise or the more expensive and riskier startup.

Why Most People Don’t Start Businesses

Most people are willing to work hard for success.   It is said that the definition of an entrepreneur is someone who is willing to trade a 40 hour work week for an 80 hour work week.  So maybe it’s the “hard work”  that kills the dream in would-be entrepreneurs.  I don’t think so.  In my experience talking to thousands of new franchise candidates,  I have come to believe it’s a fear of failure that causes most capable men and women to never even give it a go!

However,  The Future Looks Promising

Franchising has rebounded since the recession of 2009.  The nation’s franchisors are opening new units at a pace of about 12,000 a year according to the International Franchise Association’s 2015 Economic Impact Report.  In addition,  according to the Direct Selling Association,  network marketing membership went from 18.2 million to 20.2 million in 2015.  That’s 5,500 new people every day in the United States joining a network marketing company! Furthermore,  that number is probably much higher when considering the number of network marketing companies that are not members of the DSA.   These numbers are not even counted!

3 Things to Know When You Are Going Into Business

There is an old business adage that states,  “If you fail to plan,  you can plan on failing.”  People fail in business because either they fail to diligently research a new business opportunity,  or there are simply no verifiable facts to analyze.

When I work with a client trying to find a great business opportunity,  we focus our research in 3 primary areas:

  1. Is the unit level economic model of this business proving out over time for the vast majority of its participants?
  2. What is the intrinsic value in buying this particular concept/model?
  3. Are you a culture fit for this business?

How do we uncover the answers to these questions?   Research,  analysis and validation.  Let’s look broadly at three business categories from the perspective of the three questions above:

  1. Business Start Up
  2. MLM (network marketing/direct sales)
  3. Franchise

Independent Business Start Ups

First,  let’s take a look at independent business start ups.   In Neil Patel’s 2015 Forbes article,  he states that 90% of business start ups fail in the US.   This number is widely distributed throughout business circles.   But this group of failures is made up of the risk takers,  true entrepreneurs,  and business pioneers.   These entrepreneurs are willing to venture into uncharted markets at the risk of losing it all for the slightest opportunity to hit the jackpot.  Many fail,  yet many shake off the dust and jump right back into a new venture.

These business models are rarely validated prior to the investment.  Typically,  there is no verifiable information on average revenues,  true costs or expected profit margins because they are not following an established model.  These are the trail blazers.

Most Americans are not pioneers,  but God bless those who are.  By creating new and successful business models through determination and failure,  they will pave the way for the smart franchise buyers of the future.

What About the MLM?

Millions of Americans are sold the dream of an MLM.  The industry proudly touts the magnificent lives of the leadership.   You see the the luxury cars,  huge mansions,  extravagant vacations,  and their “six figure incomes.”  Lives full of grandeur are held out as the carrot of success,  and some actually achieve it.   The Direct Selling Association states that the drop-out rate in MLMs is right around 50% annually.  The unveiled truth is that the vast majority make little headway toward the larger goal of building a sustainable business.

MLMs are very low cost/low risk endeavors.   Typically the barrier to entry is simply a couple hundred bucks.   But when you try to do the necessary research and validation to truly prove out the model realistically,  where do you go?  Your friend or neighbor who is trying to “recruit” you into this fabulous opportunity isn’t what you would consider a “success.”   Of course,  they show you pictures of what their glamorous “success” looks like,  and you may even get the opportunity to meet a person who certainly appears to be a “success.”   The thing is,  there is never any actual data on the average revenue generated to support the expected travel costs,  the cost of marketing products let alone the mandatory “tools” of the trade.

Are MLMs Really a Wise Choice? 

What is the intrinsic value of an MLM?  Let’s look at the pros and cons.   Normally,  in an MLM type business,  the entry “kit” includes a package of products priced out at “wholesale” pricing.   That’s good.   If I am going to represent a line of products,  I better be familiar with them.   Does the offering include any training?  Typically,  there is very little if any.  Does it include access to IT systems,  operating manuals and/or  marketing plans?  Sometimes,  but most are not very sophisticated.   Is a tried and true business plan being offered?  Is there an opportunity to write one?  In order to make a rational decision on a business venture,  the wise thing to do would be to study the model intelligently prior to committing money,  time and energy into the offering?  Normally,  all there is is word of mouth and a few comments on the internet creating the perceived validation.  Which admittedly is not my idea of good research and analytics.  In conclusion,  due to the difficulty in determining value in the MLM model,  it would be hard for me to recommend this option.

Finally,  Franchising

Only in franchising is there a Federal Trade Commission mandate that every franchise sold in the US have an itemized full disclosure document.   It is required that every candidate interested in buying a franchise be given this document at least two weeks prior to any money exchanging hands.  Typically the research and validation process takes much longer.

Within this mandate,  an incredibly important disclosure on the experience of the leadership team can be found.  In addition,  there is a full financial disclosure on the health of the business,  along with any and all costs,  fees or expenses that may or may not be incurred by the buyer.  Also included are the expectations of both parties outlined in detail,  and the success rate of past franchisees is clear and evident.   What is expected,  but not necessarily required,  is a full disclosure on the financial model at the unit level.   However,  a list of franchisees with contact information is required,  and EVERY candidate should call as many franchisees as possible in order to get a clear understanding of every aspect of the business they are considering.

I represent some terrific “work from home” franchises that start as low as $15,000,  which is not much higher than an MLM if all costs are honestly disclosed.  Even the low-cost franchises fall under the same disclosure laws as the most expensive ones.

Conclusion

In the end,  the choice is yours:  Risk it all on a new start up by blazing a new trail for others to follow,  chase the near-impossible dream of an MLM,  or follow the established,  verifiable path that others paid the price to pave. With all the facts laid out,  it would seem that the choice is obvious.

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