Direct Selling: The Great Equalizer and Opportunity

    Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

    This article was written by the former President of the DSA, Neil Offen. It was published in Direct Selling News magazine. The article was so well-written that I requested permission to republish on my site. In the article, Neil dispels of several myths about network marketing and he casts a strong vision on ways to improve its reputation. I’ll gladly share my site with anyone willing to LEAD the industry in a better direction. At a time when the industry is being attacked by people with a financial incentive to bring it all down, this content is important and it’s very worthy of your attention. +Kevin Thompson

    By Neil H. Offen

    Neil Offen New Perspectives Direct Selling

    It has been slightly over two years since I retired after 40 years with the Direct Selling Association (DSA), first as a staff attorney and lobbyist and eventually as President and CEO. In addition, I was there at the creation of the Direct Selling Education Foundation (DSEF) and the World Federation of Direct Selling Associations (WFDSA), serving as Vice Chairman and Secretary General, respectively, of those two organizations.

    I have spent some 42 years in our industry—the reality is that it’s a method of distribution more than an industry per se—representing it, protecting it, promoting it and policing it. To say the least, I have seen much change, much adaptation, and much growth and innovation during that period. At the same time, I have seen the industry’s core values remain focused on empowering people one individual at a time, seen it being led by women and men of integrity and high moral character, and seen a continuing commitment to and passion for our distributors by corporate management.

    I have also witnessed a spirit of service by our industry and its companies, their personnel and their representatives in the field in the various communities in which they operate. Given all of the good that our industry represents, it is disappointing to see the negative attacks on it. At this juncture in the road, the direct selling industry faces the question: Do we let our critics define us or do we take steps to make sure we better control our own reputation?

    To explain what I mean, I will be focusing on four areas. One disclaimer that I need to make at the outset is that I am speaking for myself and only myself. I am not representing the DSA, the WFDSA or any other entity.

    The four areas I will discuss are the industry’s attributes, the negative myths and canards leveled against it, the actions that can harm the reputation of the industry, and finally, what I see as possible solutions and courses of action that will continue to protect, promote and enhance the reputation of the direct selling industry. I use the terms sales personsconsultantsdistributors and representatives interchangeably throughout the article.

    Do we let our critics define us or do we take steps to make sure we better control our own reputation?

    Direct Selling Attributes: What Are They?

    All of us working in direct selling believe in its positive attributes. I’ve listed here those truths about the direct selling opportunity that I believe are most powerful:

    1. It empowers people. Its diversity is without bounds. It offers opportunities for people to set their own objectives, great or small, through full- or part-time efforts, for career opportunities or merely for supplemental income. It is an industry that directly ties reward to effort. It does not discriminate based on race, gender, national origin, religion, age, physical condition, educational background, political beliefs or financial resources;
    2. It provides unlimited flexibility for the individual to achieve her or his own   goals and control the time spent in the business as well as how that time is spent;
    3. It drives micro-enterprise development wherever it operates—in a world seeking and needing such enterprises—and is a robust, grassroots source of business skills education, guidance and training;
    4. It motivates people through providing recognition, quality products and services, technical resources and an overall nurturing environment with ongoing symbiotic support;
    5. It provides opportunities with minimal capital investment or risk of loss;
    6. It provides consumers with outstanding product warranties and guarantees in each marketplace in which it operates;
    7. Its rules and standards, through company policies and through the independently administered direct selling associations’ codes of ethics, protect both salespeople and their consumers from abuse;
    8. It is a simple business, though not necessarily an easy one, and due to the independent contractor status of each salesperson, it allows great ease of entry and egress;
    9. It is global in nature and borderless in promotion of common core values and ethical standards;
    10. It is innovative, adaptive and technologically friendly;
    11. It has a strong public service and corporate social responsibility orientation at both the corporate management and the individual distributor levels;
    12. It offers social contacts in a world where more and more people are becoming isolated from one another;
    13. It is cause-oriented where its distributors believe in the product or service or opportunity and that they are helping to fill a valuable need of friends, family, neighbors and the public at large; and
    14. It is a source of social and economic stability and opportunity within all its markets

    “Direct selling motivates people through providing recognition, quality products and services, technical resources and an overall nurturing environment with ongoing symbiotic support.”

    Myths and Canards

    Several untrue assertions regarding our industry permeate the Internet and mainstream news media. The following are some of the misstatements or outright lies often attributed to our business model.

    Myth No. 1: All—or almost all—people who participate in direct selling lose money.

    In my experience, the reality is that an overwhelming majority of people who join a direct selling company to sell products and build a business do profit from it. DSA research shows that over 80 percent of business-oriented recruits have very modest goals when joining a company and the vast majority, whether still with the firm or no longer in the industry, have their expectations met or exceeded. The distributors earning the highest level of income are the business builders who typically spend significant time on the business selling, recruiting, motivating and training distributors and consumers in their organizations. They generally constitute between 10 percent and 20 percent of the salesforce. There is nothing wrong or unethical about this model, and this is similar to most non-direct selling retail sales organizations.

    In addition, the industry has implemented safeguards against financial loss. The biggest protection against financial loss for all participating in our business is the unconditional product money-back guarantees for consumers and, for sales people, our minimum 90 percent inventory buy-back. All DSAs require their member companies to offer buy-back protection to all their distributors. Membership in a DSA is an added protection from abuse for sales people, potential sales people and consumers.

    “DSA research shows that over 80 percent of business-oriented recruits have very modest goals when joining a company and the vast majority … have their expectations met or exceeded.”

    Myth No. 2: Self-consumption by sales persons is a problematic practice.

    In fact, there is no binding precedent that establishes that a set amount of sales must be sold to persons outside the sales organization. The seminal FTC/Amway case in 1979 created a “70% rule,” but that rule only applied to the requirement that the distributors certify that they had sold at least 70 percent of their inventory in the prior month before they could be permitted to buy additional inventory. (Note: This case was long before the industry adopted the 90 percent inventory buy-back standard as part of the DSA Code of Ethics, which occurred in the mid-1990s.)

    Our industry’s standard of the buy-back removes the possibility of inventory loading if the firm is bound by the buy-back and it is properly administered. A distributor who purchases a product to personally consume it is a “consumer,” and there is nothing inherently wrong with paying compensation on these product sales.

    Myth No. 3: Multilevel direct sales firms will fail due to geometric progression and turnover rates.

    This simply may seem logical mathematically, but only if you start with the assumption that everyone is purchasing products solely to qualify to earn large amounts of compensation by creating a network and earning compensation on similar downline purchases. It does not occur in the real world because the assumption is faulty. Most persons signing up as salespeople in our industry are either seeking to buy product at a discount or for supplemental income, putting in less than 11 hours per week, and not that much in every week.

    The FTC tried to make the geometric progression argument to the Second Circuit Court of Appeals in the Ger-Ro-Mar Inc.  vs. FTCcase back in 1975. Ger-Ro-Mar sold bras and lingerie. In the words of the Second Circuit Court of Appeals:

    “We find no flaw in the mathematics or the extrapolation [presented by the FTC] and agree that the prospect of a quarter of a billion brassiere and girdle hawkers is not only impossible but frightening to contemplate, particularly since it is in excess of the present population of the Nation, only about half of whom hopefully are prospective lingerie consumers. However, we live in a real world and not fantasyland (emphasis added).”

    As stated above, the reality is that a majority join a direct sales firm either after having been a customer or wishing to buy its products at a discounted price. Most sales people and most direct sales firms market low-ticket, consumable products, and my educated guess is that over 50 percent of such sales people are sales people in name only. They buy the firms’ products at a discounted price for personal consumption and do not sell products or recruit other distributors. This percentage of “discount buyers” may approach over 90 percent of the salesforce of some firms and account for over 90 percent of product sales.

    As with any sales organization, the industry experiences a high rate of turnover in its salesforce, but people join and leave a salesforce for a variety of reasons. For example, if a woman was working only one month before Christmas to earn Christmas present money, she would contribute to the high turnover rate even though she might return year after year for decades during the Christmas season. In addition, based on data that I have seen over the years, many sales people sell for more than one direct sales firm during the year, either simultaneously or at different times. I believe that between 10 percent and 20 percent of the sales organization falls into this category, thereby overstating turnover rates.

    One final point on the geometric progression canard: I believe that the turnover rate of retail store personnel and franchise employees is very high. Strange that we don’t hear more about that and the fact that some work in retail stores because they are given employee discounts as part of their compensation plan. According to recent data, retail store employee discounts are often extended to the employee’s family and even sometimes to friends.

    “The percentage of “discount buyers” may approach over 90 percent of the salesforce of some firms and account for over 90 percent of product sales.”

    Actions That Can Harm the Reputation of the Industry

    The reputation of our industry can be negatively impacted by a number of factors including the following:

    1. Misconduct by a Member of a Salesforce

    As sales people in any industry, most participants in direct selling conduct business in an ethical and consumer- and recruit-friendly manner. It is unfortunate but true that the reputation of the industry is negatively impacted if a participant inappropriately markets products or the income opportunity in a misleading way. Given the millions of participants in the direct selling industry, even the acts of a small percentage of participants can create significant reputational harm. Examples of acts that can damage the industry’s reputation include:

    • Exaggerated earnings claims made to prospective recruits;
    • Exaggerated or false product claims;
    • High-pressure recruiting and sales tactics; and
    • Excessive non-corporate training/motivational expenses.

    2. Business Practices

    It is also important that companies properly evaluate business initiatives and compensation incentives before they are implemented to make sure they do not motivate or incentivize problematic behavior.  For example, I believe that compensating the salesforce for sign-up fees—which is one strong indicator of a possible pyramid scheme—as well as sales kits and aids, samples, and training fees and materials can create an incentive that increases the cost of the investment to join the business and the associated potential risk of loss to a new participant.

    “It is important that companies properly evaluate business initiatives and compensation incentives before they are implemented to make sure they do not motivate or incentivize problematic behavior.”

    3. Enforcement of Distributor Policies and Codes of Ethics

    If a company fails to diligently monitor the activities of its salesforce and enforce its ethical standards, regulations and policies, it will ultimately contribute to inappropriate actions that damage not only the reputation of the company but also the industry. A large number of participants join our industry each month, which makes it an imperative that companies adequately train the salesforce on marketing claims, legal requirements and the industry’s code of ethics. Companies cannot be passive in this effort.

    My Vision

    Having touched upon some of the attributes, myths and problematic practices, let me now turn to a view of the future that maximizes our positive attributes and potentially helps quash some of the negative stereotypes and myths that presently afflict us. Here are my high-level recommendations for the industry that I believe will further strengthen the industry and its reputation.

    1. Continue to Enhance Consumer Protective Measures

    I believe our industry has done a remarkable job developing consumer and distributor protective policies and codes of ethics. The industry standard of a 12-month return policy plays a critical role in protecting distributors from inventory loading risks. Unconditional 100 percent consumer product money-back guarantees should continue to be encouraged.

    The DSA Code of Ethics establishes a baseline of important ethical practices for companies to follow. It is important that we continue to evaluate whether there are additional measures that can be adopted to further enhance the protection of consumers and distributors. The following are areas where I think additional protections may be beneficial to consumers, distributors and the industry:

    Compensation Summary: I believe the industry should adopt and implement an industry-wide standard of transparency and disclosure regarding various relevant aspects of compensation earned by its salesforce members. Many of our companies already make such disclosures, which provide prospective recruits with protection from misleading claims that could be made by a participant in the salesforce. No one can criticize us if we provide full disclosure of earnings. Presenting prospective recruits with detailed distributor earnings data during the recruiting process as well as on our websites and in our literature will eliminate most of the risk of the salesforce exaggerating the opportunities we are offering.

    It is important that such disclosure be complete and provide sufficient information to furnish a fair overview of the earnings potential. Creating an industry standard will assist other companies and provide a norm they can follow. Once in place, all companies taking this transparency approach would be free from any charges of financially misleading members and prospective members of the salesforce.

    Minimizing Risk of Loss: A critical component of the industry’s code of ethics is its 12-month inventory return policy, which was adopted to reduce the risk of loss for new participants. Salespeople utilizing the return policies should be able to do so easily and expeditiously. The industry also needs to remain diligent in monitoring and evaluating trends and developments in business practices and activities of direct sellers to identify additional measures that should be adopted to ensure the industry always has comprehensive measures to protect consumers and distributors.

    For example, I recommend that it should be made more clear that the current buy-back policy includes other purchases by new participants in the business such as sales aids, training costs and starter kits. I believe that DSAs should promulgate code provisions to codify some of the best practices in the industry, including restricting payments on certain types of compensation.

    “I believe the industry should adopt and implement an industry-wide standard of transparency and disclosure regarding various relevant aspects of compensation earned by its salesforce members.”


    2. Educate Our Constituencies

    • Members in the DSAs should take the opportunity to participate in industry research and surveys done by outside third-party firms retained by DSAs so that the industry will have accurate and credible data for use with the press, governmental entities, academia and other constituencies.
    • Member companies can further increase their focus on educating their salesforce and customers regarding compliance policies and codes of ethics. Having a salesforce that is knowledgeable about the code of ethics—and their responsibilities under such code—is important to the long-term success of our industry. Member companies should have the necessary compliance staff and provide the training to accomplish this. I believe the head of this function should report to the CEO or general counsel. Companies should also have a whistle-blower system in place.
    • Member companies should work to further improve their customer relations departments with a philosophy of total consumer and distributor satisfaction and excellent service. This is not just good business, it’s also smart business.
    • There should be ongoing and significant public education efforts portraying the industry as it truly is, through public relations efforts based on solid data and useful information, public service activities, promotion of quality research, excellent use of social media channels and targeted projects to educate key influencers in society (e.g., legislators, regulators, the financial press, the “style” and general news media, academia, think tanks and consumer protection organizations). We have an opportunity to tell “our story,” much more effectively. This will require substantially increased financial commitments by the companies to those efforts.
    • Annually, the WFDSA global “best practices” exchanges will ensure our industry is operating in all our markets on a consistent basis, at the highest ethical levels, and with the most effective ways to protect our corporate interests through taking the high road in building and sustaining our reputation, image and brand. Strengthening DSAs across the globe strengthens our industry. All industry firms should belong to the national DSA in the countries in which they operate.


    Now is not the time to relax in our efforts to be a consumer-friendly, consumer-protective industry. This is critical to our long-term success and the success of the people who rely on this industry for income opportunities and life-enhancing products. We must constantly evaluate our business trends and practices and be willing to take additional steps to protect our industry and its participants.

    Having worked in 50 countries throughout my career, I have seen that the DSAs that are most successful are those with the support of the majority of companies in the country. I believe strong DSAs are critical to success, and I can’t emphasize enough that all industry companies should be members of the association in the countries in which they do business to most effectively do the job necessary on behalf of the industry.

    “Now is not the time to relax in our efforts to be a consumer-friendly, consumer-protective industry”

    Our business model not only works, but it is also a good thing for free enterprise, society and individual freedom. Its success is built on maintaining existing and establishing new personal relationships based on truth and trust. We and our sales people want happy customers and satisfied recruits. We and our sales people want to be good corporate citizens and contribute to society. In other words, we and our sales people want to do well while doing good.

    The original article is published on the Direct Selling News website. Direct Selling News is the trade magazine serving direct selling and network marketing executives since 2004. Subscriptions are available in the App Store and Google Play Store via this link:

    Herbalife: Why I Made It a 35% Position after the Bill Ackman Bear Raid

      Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

      This is a guest post prepared by Robert Chapman. Chapman is the founder of Chapman Capital LLC, which is a Los Angeles based investment company specializing in takeovers and turnarounds. In 2000, Chapman Capital was an activist versus Herbalife following the death of Herbalife’s founder Mark Hughes. This is an amazing article. It’s well-researched and easy to understand.  If you’re remotely curious about the future of Herbalife after Ackman’s attack, the mechanics of short selling and the potential value of Herbalife’s stock, this is a MUST read. If you find this article informative, hit the +1 or Like buttons above. Sincerely, +Kevin Thompson

      Note: Note: Below is the opinion of Chapman Capital LLC and is not a recommendation or an indication of Chapman Capital’s current or future intent to buy, sell or otherwise transact in Herbalife common shares.

      Update: Robert Chapman made some slight revisions to the article. His points are the same; however, he made a few stylistic changes.

      As anyone even remotely connected to the world of multi level marketing is surely aware, the perpetually sanctimonious Bill Ackman and his extremely successful investment advisory firm Pershing Square formally launched a massive bear raid on Herbalife (HLF) on 12/20/2012, conducting a 3+ hour, media-packed, web-streamed 300+ PowerPoint slide deck presentation in New York after first selling short 20MM HLF shares for as estimated $1 billion plus in proceeds.   In his presentation and numerous interviews with the business media that day, Ackman declared a target price of zero for HLF’s shares.  In other words, he claims to be so convinced that Herbalife operates an illegal pyramid scheme, he is certain that government authorities and/or HLF’s distributors/salespeople/customers will shortly put the company out of business.

      SUMMARY INVESTMENT THESIS: Despite beguiling and specious reasoning, Ackman will fail to influence/cause a material regulatory response or a HLF distributor exodus. Consequently, he will suffer a merciless short squeeze, catalyzed and augmented by a fast and furious combination of HLF share count shrinkage (buyback) and excellent operating performance (beat and raise dynamic).

      REGUATORY SUMMARY: FTC has been there, done that.

      The Ackman Tell. Many poker games are won and lost upon that infamous turning point when a player properly reads his opponent’s “tell.” To wit, I am confident that during an interview with CNBC’s Andrew Ross Sorkin on “D-Day” (12/20/2012), Bill Ackman slipped his “tell”, confirming my suspicion that he already realized the FTC wasn’t going to make his day by shutting down HLF. I strongly recommend all HLF traders/investors read the transcript of this interview, as Sorkin does a masterful job of fighting the media urge to genuflect before Ackman’s drawn down zipper, otherwise known as “The Whitney Tilson”. Specifically, Sorkin, after hammering Ackman, asked toward the end of this interview, “This is somewhat dependent on the FTC taking action. If they don’t, what happens?” Now, remember that Ackman’s entire thesis rests on his certitude (so he claims) that HLF is an illegal pyramid scheme, which the FTC has a mandate to shut down. If you were 100% certain (with 20% of HLF shorted in your funds alone) of this claim, wouldn’t your answer be, “There is no way the FTC doesn’t take action to shut down the illegal pyramid scheme run by Herbalife.” Instead, Ackman diffidently responds, “I think the FTC is going to take a very hard look. But I think most importantly the new distributor someone is trying to suck into the scheme will be better informed …”

      The moment I read this response, after having researched HLF on/off since 2000 (when Chapman Capital had been an activist in HERBA/HERBB shares during Mark Hughes’ LBO efforts), I decided I had to place a monster long bet on HLF. I believe Ackman already had concluded the FTC wasn’t going to assist his crusade. Instead, he realized that he had to focus on existing and prospective HLF distributors, praying the media attention would have a materially deleterious impact on any decision to join or to continue with the HLF team. Indeed, without the FTC taking injunctive actions against HLF, Ackman’s crusade toward “zero” is doomed.

      Here are key bullet points on the lack of real regulatory risk to HLF shares:

      Internal Consumption Issue Already Clarified/Resolved by FTC in 2004: “the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme” is a quote from an FTC letter dated 01/14/2004. Essentially, the letter states that if a product is marketable, the FTC is OK with the MLM, making Einhorn’s 05/01/2012 call focusing questions on this internal consumption issue far less relevant than was (mis)understood.

      FTC Material Adverse Actions Near Zero Probability:  during my due diligence, I spoke with the country’s top lawyer specializing in MLM/regulatory dynamics. During our conversation, he offered his legal opinion, pointedly stating that there won’t be any FTC injunction, much less any regulatory action to put HLF out of business (“hell freezes over before this happens”). If there is regulatory action of any kind, it simply will be some type of consent order/settlement addressing better disclosure.

      Few Consumer Complaints:  the FTC has not received many consumer complaints on HLF products – only 37 in 2010, 36 in 2009, and YTD 05/2012 was only 18 (again around 40 annually).

      HLF is Big, Time Tested Veteran:  the FTC can and will shut down companies violating MLM rules, just as it did BurnLounge (online music retailer) in 03/2012 and Equinox in 2000. While such action is rare, the FTC will act aggressively to shut down companies when it sees the need. During the 32 years of HLF’s existence, the FTC has yet to see the need to pursue Herbalife.

      Ackman Relied Greatly on Old Cases, Leaving Out Material Facts – Ackman failed point out that the FTC has already commented about the relevance (or lack thereof) of the cases he referenced in his presentation. In fact, most of the post Einhorn reporting has been misleading information;

      No Federal Clarity – lots of Grey:  No “bright line” federal statute against pyramid schemes; even the guy with jihad against MLM’s, Pyramid Scheme Alert’s Robert FitzPatrick, conceded that FTC decided too complex to regulate MLM’s in 09/2011 and other anti-MLM consumer protectors have as well; this MLM lawyer thinks DSA should fight for bright line federal standards to eliminate opportunity for short sellers to exploit the grey;

      Vast Preponderance of Sales and Growth are International (i.e., Outside Ackman/FTC): 80% of HLF’s business overseas.

      The DSA is an Effective Lobby: The DSA serves as a lobbying entity designed to protect the MLM industry from burdensome government regulations. It led a campaign in 2006 where 17,000 comments were submitted to the FTC, all requesting an exemption from the restrictive requirements in the Business Opportunity rule. The DSA was successful. The DSA is more powerful that Ackman’s ally, Pyramid Scheme Alert’s Robert FitzPatrick

      DISTRIBUTOR SUMMARY:  “Bill who?”

      Chapman Capital’s distributor surveys show no meaningful percentage of distributors had even heard about Ackman’s circus show. Moreover, their evangelical commitment to HLF and confusion as to what 300+ pages of PowerPoint means seem to be causing an acceleration of business growth. Ackman’s payment for Google Ads (pegged to “Herbalife” search) exhibits his desperation to influence distributors, efforts which appear to have negligible effect.

      TAILWINDS — FAT TAILS AND BUSINESS BAILS  HLF has two secular tailwinds in its favor: lots of fat people (fat “tails”) and no shortage of structurally un/underemployed humans. In fact, one thought for a short in HLF to consider is the following: net/net, does the U.S. government benefit from fewer overweight Americans (lower insurance costs) and fewer people standing in unemployment lines (ever hear of a fiscal cliff problem with U.S. budget?)? If the U.S. government benefits from HLF’s impact on the country’s physical and fiscal health, while enduring only 40 complaints/year about HLF, why shut down HLF? Ponder that for a moment.

      BACKGROUND: Short seller roadkill HLF shares were trading as high as $45/share on 12/14/2012, and had been over $70/share (a high teens P/E multiple) earlier this year before the highly respected investor David Einhorn of Greenlight Capital asked some leading questions on an earnings call that implied he was skeptical that Herbalife was operating within the Amway safe harbor guidelines for multi-level marketers. Fear of Einhorn’s excellent record of identifying overvalued short sale targets sent HLF shares into the $40’s in the spring. In contrast, Ackman has been somewhat vague as to when he built the preponderance of his short position (i.e., did he start before Einhorn’s 05/01/2012 questions or was he an unoriginal shadow to Einhorn’s trailblazing?), but I am guessing $50-55/share is his average short cost basis. There is no evidence Einhorn went short at that time or since, but I would be shocked if Greenlight would maintain HLF short positions anywhere near $30/share based on HLF’s international value alone.

      Open interest on HLF puts accelerated and the stock’s relative weakness worsened in the fall of 2012 as, I suspect – No evidence here. I’ve just been around the block a few times – people “around” Ackman shorted HLF or bought HLF puts ahead of 12/20/2012 presentation. In fact, I have a pet theory that Ackman’s interest in going massively public was heightened (if not driven) by the HLF stock’s reasonably strong response (into mid-$50/share) attendant with impressive late July and October 2012 financial results. Essentially, my hypothesis is that Ackman, with overall 2012 performance impaired by JCP’s descent into the teens, came to conclude he needed a big winner before year-end 2012.

      As word leaked into the market of Ackman’s intention to present publicly the bear case on Herbalife, the stock began a gradual decline, then fell suddenly from ~$41/share to $36/share in the closing market hours of 12/19/2012, when a CNBC reporter with big hair reported that market rumors were true. The next morning, as the PT Barnum of the hedge fund industry delivered his presentation in a New York hotel ballroom on 12/20/2012, and especially through the early trading hours of 12/21/2012 (a very illiquid trading day), the shares went into free fall, reaching a nadir of $24.40/share. My funds made their last purchases at $25.30/share in a brief but painful period of negative marks. HLF shares have since rebounded to ~$30/share as traders/investors have taken a closer look at whether the emperor is running around New York denuded (figuratively speaking . . . fortunately).

      ACKMAN’S TIMING OF “INTEREST” Ackman’s end-of-same-year-that-Einhorn-showed-up timing was masterful – when it comes to the power of influence, only top hypnotists can compete. A classic bear raid involves creating abject panic in the market. Concurrently using the proximity to Christmas, the December option expiration, and the depth of his presentation, the Ackman impact on the shares was maximized. The last ten days of December are as quiet as it gets on Wall Street, with most decision makers leaving for vacation, drying up market depth and liquidity. Also, at the peak of the panic not many institutional investors felt the urge to have HLF show up in their 12/31/2012 Form 13-F filing. December is also the final month of HLF’s fiscal year, which puts them in a “blackout period,” prohibiting the company and insiders from repurchasing shares under the $950mm authorized buyback. Moreover, due to the extensive audit period that attends year-end, it will be several months before year-end 2012 results were reported. This blackout removes HLF’s most effective defense to the bear raid: executing a nearly $1 billion share repurchase authorization. Again, if timing is everything, Ackman is every woman (with a nod to Whitney Houston).

      PERSHING SQUARE/ACKMAN RESUME:  Let’s review some history on Bill Ackman and Pershing Square, some color on the mechanics of short selling, and Herbalife’s response to the bear raid to date.

      Bill Ackman manages a New York based hedge fund called Pershing Square with exceptionally good long-term results. Ackman is not known as a short seller. His fund is generally a long-biased fund. He achieved some notoriety for predicting that muni-bond insurer MBIA was undercapitalized, which eventually proved true during the financial crisis of 2007-2009. His enormous investment in General Growth Properties (GGP) at less than $1/share remains one of the most impressive brains/balls combinations I have ever seen. All the while, however, his ego seems boundless.

      He is somewhat unusual among usually media averse hedge fund managers in that his strategy involves publicly trumpeting the merits (and genius) of his investments, which he generally holds for a long time. He manages a concentrated portfolio comprised of very few, very large investments. He also is considered an activist investor. He frequently badgers the board and management of the companies in which he invests with what start as suggestions and frequently escalate to demands as to how they should conduct their business, what their capital structure should be, and the composition of its board.

      Though he will rarely, if ever, publicly concede, Ackman makes mistakes just like the rest of us, even catastrophic financial ones (e.g., call options on Target). Indeed, Ackman closed down a previous hedge fund advisory entity called Gotham Partners after he reportedly marooned his investment funds in an illiquid and devastating combination of a closely held REIT (First Union Real Estate) and a portfolio of golf courses (Gotham Golf) for which no exit was possible. So while Ackman is quite good at what he does for a living, his hubris makes him vulnerable to spectacular failure. He has a high financial IQ, but it may be the delusional and narcissistically 15 surplus IQ points he awards himself that have been, and may again be, his undoing. Think of him as the Reggie Jackson (I’m dating myself here) of Wall Street: he swings for the fences, but can cause a lot of pain and break a lot of hearts – or the bank – when he whiffs.

      SHORT SELLING PRIMER: A bit more on short selling for those inexperienced in the sport. Short selling is a vital component of the markets. The ability of investors to sell short shares of overvalued companies keeps market valuations in check, and permits investors to hold hedged portfolios that are not dependent on constantly rising indices to make a positive return. There are risks, however, of going short that do not exist on the long side. For instance, if one purchases the shares of Acme Widget at $10/share, and Acme fails, you know precisely how much you will lose – your $10/share, and no more. If you were to short Acme Widget at $10/share and Acme were to discover a vast plutonium mine under their headquarters, those shares that were shorted at $10/share may have to be repurchased in the market at $100/share, $500/share, or even $1,000/share. The potential loss on a short sale is unlimited. For this reason, most professional long/short investors keep the size of their short positions much smaller than their long positions. For instance, if a core long position is 5% of capital, a core short may be 2%. Last week in Barron’s, famed short seller Jim Chanos discussed his lessons learned from the 1999-2000 internet bubble when he saw his AOL short go up eight times in value in his face. The lesson he drew was to keep individual shorts small relative to capital. Ackman’s $1 billion short in Herbalife is almost 10% of his reported $11 billion fund. If he is wrong, he may very well be putting his firm at risk due to the enormity of his short position relative to both Pershing Square’s and HLF’s size, and the potential difficulty of covering a short position of that magnitude in a “short squeeze”. Google the notorious Volkswagen/Porsche trade to see how dramatically these events can play out at the extremes.

      To go short a company’s stock, one must borrow the shares to sell from a broker. Shorting without a proper borrow is called “naked shorting”, and is illegal. Holders of stock give their broker the right to lend out their shares in exchange for the flexibility of keeping margin accounts, and to participate in a portion of the fees short sellers incur for access to those shares. Short selling is conducted by the investor calling his broker, securing a borrow, and then executing the sale. Most companies have ample shares available to borrow, and this process yields little drama. However, in the case of controversial stocks, the demand to borrow shares may exceed the supply in the brokers “box”. If long holders sell shares brokers had out on loan to short sellers, the short seller must replace those borrowed shares he has lost access to with newly sourced shares. Should none be found, he will be forced to cover that portion of his position, and if unwilling to cover, the broker will involuntarily “buy him in”. This dynamic is what leads to short squeezes, where heavily shorted issues rapidly appreciate in the absence of any fundamental reason. Just look back to 2008 when the US government suddenly prohibited the shorting of financial stocks to see how painful that result can be for short sellers.

      One effective defense for the short seller would be to have his broker contract on his behalf with a lender of shares to provide a quantity of shares for a specific term, at a negotiated payment. This insulates the short seller from buy-in risk for the duration of the contract. However, these contracts are individually negotiated, and somewhat rare. Also, they frequently permit the long holder to regain access to his shares if the company were to, for instance, conduct a self-tender offer for its shares. It is not known if Ackman has such an arrangement.

      Ackman’s self-reported short position of 20 million HLF shares is over 75% of the reported short interest in Herbalife. At this point, the “borrow is tight” – there appears to be a near zero supply of shares available to sell short. The few brokers that will supply a borrow are charging as much as 20% of the value of the short annually for that access. This is a monster number – between the 20% negative-borrow and HLF’s dividend, it would cost nearly 25% each year to stay short HLF, all things remaining constant on those two variables.

      HLF’s DEFENSE IS COMING:  Given the holiday timing, the best defense HLF has been able to muster has been to put a video of CEO Mike Johnson on its IR webpage defending the company broadly, and to schedule an investors’ day two weeks later, for 01/10/2013 in New York to address Ackman’s accusations in detail. The company has hired an impressive team of advisors. While most would have expected Bank of America/Merrill Lynch to get the assignment given their execution of last spring’s $400mm share repurchase, the task has been given to Moelis & Company, a well regarded, Los Angeles-based boutique investment banking firm. The firm’s namesake, Ken Moelis, is a disciple of Mike Milken from the height of Drexel Burnham’s power in the mid-1980’s. Moelis went on to a successful career at DLJ and UBS, where he became the premier investment banker to the casino gaming world, before launching his own shop.

      Additionally, Herbalife has reportedly hired Boies, Shiller & Flexner the law firm founded by famed litigator David Boies. Consider Boies’ HLF team to be the Navy Seals Team 6 of litigation – you really don’t want them on the other side of your war. Note, I have no evidence that Bill Ackman is related to Osama bin Laden, and thus worthy of being targeted by DEVGRU (figuratively speaking, of course).

      HLF promises a detailed rebuttal of the Ackman allegations on 01/10/2013, and I expect it will blow away the skeptics with a point-by-point dissection of Ackman’s claims. I presume Boies was brought on to bring suit against Ackman for some combination of libel, slander, defamation, tortuous interference and other imaginative causes of action. No matter how this turns out, the discovery, depositions and testimony should be highly enlightening and probably quite entertaining.

      HLF’s DIRT CHEAP VALUATION:  So now, how might one value the shares of HLF in the bull case where Ackman is convincingly discredited by HLF CEO Johnson (a singular American bad-ass, according to my sources who know him personally here in L.A.) on 01/10/2013, and the market no longer ascribes risk to the feared FTC intervention (if I hear “headline risk” one more time …). EBITDA is a preferred valuation metric for a company like HLF that doesn’t have heavy capital expenditure requirements, and converts much of its reported earnings to cash that can be distributed as dividends or used to repurchase shares. Herbalife will produce over $725mm of earnings before interest, depreciation, and amortization (EBITDA) this year, a growth-stock worthy increase from $634mm in 2011 and $480mm in 2010. The few analysts that cover the stock project $800mm in 2013. Think of HLF’s gushing cash flow this way – HLF is printing EBITDA of over $2mm/day. That’s a heck of a lotta cheese with which to fight Ackman, who has and will be spending his own and his investors’ money on litigation and other matters (which won’t bother his limited partners until the stock is going up on a daily basis). HLF is lightly leveraged, with $500mm of bank debt, and quite liquid with $700mm of unused borrowing capacity and $300mm of cash. HLF currently pays $1.20/share in dividends annually on its ~108 million shares outstanding.

      In the absence of controversy, the market would typically accord a fast growing, capital efficient company such as HLF a premium multiple. Let’s just assume the S&P 500 index current multiple of 8x EBITDA. This would yield a total enterprise value of 8x $725 of EBITDA = $5.8B. Deducting ~$500 million of debt, but giving credit for $150 of the cash (that is excess to the operating needs of the business), would yield a total equity value of $5.45B, which divided by the 108mm shares works out to $50.46/share. The current price of ~$30/share implies an EBITDA multiple of 4.7x. Tupperware, which is a MLM free from controversy, trades at 9.3x EBITDA, and Avon trades slightly higher. At $50/share, the share still would sport a dividend yield of 2.4%. Herbalife should report net income of about $4 per share this year and $4.50 in 2013 (ignoring the massive buyback I see coming). $30/share implies a 2012 P/E multiple of around 7x. The current S&P multiple is about 13x. For a company growing 15%+, you would expect to see a premium multiple, which is why brokerage firm analysts who cover the stock have target prices from $65 to $101. My valuation is lower, but should the Ackman-induced cloud be lifted, I can’t say those targets are absurd.

      In fact, between the technical short squeeze that is in the making, the massively accretive impact of a $1B buyback, and the FTC risk fading away, I can’t say that I’d be surprised to see HLF trade back to its old highs of $70/share. If HLF has $500mm of 2013 net income, and buys back 30mm of around 110mm shares, the ultra-low interest rate environment makes the net income impact from interest expense miniscule (the HLF 13% EPS yield is 3-4x borrowing costs). Getting over $6/share in EPS is really not that hard to financially engineer, and between the short squeeze, comparable valuations, a below-market 11-12 P/E multiple would take HLF back into the $70s. Indeed, it could turn out even more financially salubrious than even these scenarios.

      Ackman’s essentially fired nuclear missiles at HLF’s business model and its legality. When (and not “if”) HLF’s regulators and distributors essentially blow off Ackman’s claims as either old or no news, HLF will for all intents/purposes become bulletproof and battle tested. This may/should garner it a higher valuation than before Einhorn or Ackman ever showed up. That “what if” scenario gets you a $100/share stock price potential (again, only 15x $6-7/share in EPS gets you there; I’m not talking about a NFLX-level valuation here).

      This hypothetical rally toward triple digits is not farfetched. In the event of a self-tender by HLF, or even without one, should the large institutional shareholders proactively remove their shares from the stock loan supply, there is great potential for short sellers being forced to cover as the borrow dries up. A panic to the upside could occur as the shorts are forced to buy in 25 million shares in a market unable to induce that many sellers. I am sure HLF and its capable teams of advisors are looking at the myriad of options to create value out of the chaos caused by this spectacular bear raid. Indeed, it does not take great imagination to see what could make these numbers dance.

      In addition, Ackman has no shortage of enemies from my own polling of the audience. The odds favor Herbalife in this aspect of the battle. Ackman truly went all-in telling the world he has shorted ~20% of a relatively unlevered company trading at ~4x EBITDA.

      BUT WHAT IF ACKMAN IS RIGHT?  His target price of zero implies the company is shut down globally, not just here in the US, which comprises only 20% of HLF’s global revenue. Is it possible? I guess so, but in my view no more than a very slim probability. More probable, in the unlikely case the FTC responds to Ackman’s presentation and reopens the same issues they have been policing for 32 years in the case of HLF, it is possible that the company could be forced to change some elements of how it conducts business in the US, and maybe elsewhere, leading to lower sales and margins. No doubt this would spook the market with fears that there was even more scrutiny to come, leading the market to value Herbalife at a discounted multiple on reduced earnings.
      So let’s take a cut at that. Let’s say the FTC somehow compels business practice changes that reduce sales by 20% and lead to current pre-tax margins contracting by 25%. This would yield EBITDA of approximately $450mm, which at 5x would yield a share price of $17. Personally, I think there is about a 10% chance of this outcome. So weighting a 10% chance of $17/share, and a 90% chance of $50/share, I come up with a fair value of $47/share, which is why I own a boatload of shares purchased into the panic created by the bear raid. In fact, there is far more likelihood of another LBO of HLF (Golden Gate/Whitney stole it the first time around) than any other “headline risk.”

      Ackman took his shot; now it is HLF’s turn.

      In a Twisted Turn of Events, Herbalife Retains Anti-MLM Firm, Boies Schiller

        Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

        Humor me for a second. Suppose prominent law firm, Dewey Cheatham & Howe, initiates a class action lawsuit against cigarette maker, Marlboro. DCH alleges that Marlboro sells cancer sticks. DCH achieves a windfall settlement from Marlboro i.e. $20,000,000! Now suppose a doctor accuses Marlboro’s competitor, Winston, of also selling cancer sticks. And when it comes time to choosing a law firm, Winston chooses……Dewey Cheatham & Howe.

        Do you see the problem?

        Herbalife has retained mega firm Boies, Schiller and Flexner

        Before discussing Herbalife’s decision, it’s important to provide a little background. Bill Ackman, hedge fund manager and founder of Pershing Square Capital Management, dropped the proverbial hammer on Herbalife. In what has been referred to as “dizzying takedown” of Herbalife, Ackman gave a 330+ slide presentation at the Ira Sohn conference in New York, arguing that Herbalife is an illegal pyramid scheme on the verge of collapse. When choosing his tools for the Herbalife autopsy, Ackman skipped right over the scalpel and went straight for the sledge-hammer.

        Herbalife’s decision to retain Boies Schiller came to light in the Wall Street Journal’s story titled “Herbalife Goes on Offensive.” Out of all of the law firms in America, it’s extremely confusing to me why Herbalife would retain Boies Schiller (assuming the report is true). Currently, it’s unclear what exactly Boies Schiller will be doing for Herbalife. Given the timing, I suspect they’re being asked to help Herbalife deal with Ackman i.e. suing Ackman. If this is the case, hell has truly frozen over.

        Boies Schiller recently received a settlement from Amway, resulting in legal fees “up to $20,000,000!” I’m not making this up. In late 2006, Boies Schiller initiated a class action lawsuit against Amway. In the lawsuit, they made most of the same arguments used by Ackman in his presentation i.e. there are minimal retail sales, the products lack quality, the buyback policy is ineffective, internal consumption is bad, etc. Their anti-MLM sentiment is made obvious in the first paragraph of the lawsuit against Amway (included below, written and filed by Boies Schiller!):

        This pyramid scheme [Amway] is fraudulent because it induces individuals to invest in products and marketing tools and to recruit new victims into the scheme with the false promise of enormous profits. . . Because [Amway] distributors most often do not sell products to consumers who are not also distributors, they can obtain a return on their investment in the [Amway] program only by recruiting new distributors who will then buy products and recruit more distributors who will buy products.

        And this firm has been asked to protect Herbalife.

        Soon, I’ll be providing a more detailed analysis of Ackman’s position against Herbalife. In summary, the MLM industry is about to change, for better or worse. There’s no doubt about it. While there have been plenty of attempts in the past by lawyers and disgruntled distributors to air the dirty laundry of companies, there has never been anything like Ackman. Not even close. He’s all over the news, seemingly rubbing the FTC’s nose in a pile of poop. He’s creating the impression that the FTC has fallen asleep at the wheel. Whether that’s true or not is a topic for another post.

        How can Boies Schiller effectively represent Herbalife? And really, they’re not only being asked to protect Herbalife, they’re indirectly being asked to protect the legitimacy of the entire industry. It seems bizarre for a firm to profiteer on two sides of the same issue….especially when those sides are on polar opposites.

        In this fight with Ackman, Herbalife needs to restore confidence in its business model. Retaining Boies Schiller is a huge step in the wrong direction.

        See below for the class action lawsuit filed by Boies Schiller against Amway

        See below for Ackman’s presentation about Herbalife

        There are a lot of similarities in Ackman’s arguments and those used by Boies Schiller against Amway.

        DSA Convention 2012 – Inspiring Entrepreneurs

          Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

          This year’s DSA annual meeting was held in Dallas, Texas. It was a really cool event! We had phenomenal speakers, the best being none other than George W. Bush. I was skeptical before joining the DSA two years ago. I’m just not a “trade association” kind of guy. I’m so happy I joined! It’s a great organization charged with a complicated and important task of representing the interests of a very diverse industry. While I give the DSA a hard time about not doing enough with respect to the DSA’s pyramid legislation, I understand that it’s hard for a trade association to pivot when it’s trying to appease hundreds of companies, each with a unique set of needs and concerns.

          Below are some of my favorite pictures from the DSA convention.

          IMG 4896

          I have a lot of respect for Richard Bliss Brooke. He’s been very supportive of my participation in the DSA.  He encouraged me to get involved in both the Ethics Committee and the Government Relations Committee.  As someone that wanted to positively impact the direct sales community, getting involved with those committees was a crucial first step. He also gave me a kick in the ass to get started on my book. I made a commitment to get the content done by September 3. I’ve got a lot of work to do!

          IMG 4897

          Joe Mariano is someone else I hold in high esteem.  As the president of the DSA, he’s got a very challenging job. As a trade association, the DSA is comprised of over 100 member companies and a few hundred supplier members.  He’s got the difficult job of aggregating the collective will of that community while leading a team that follows legislation all across the country.  It’s really incredible when you think about the complexity of the entire operation. Joe has been very generous in allowing me to be part of the important conversations about the industry.  

          Gerald Nehra is one of the kindest men I’ve ever met.  He’s also a great competitor.  He was one of the original MLM attorneys.  Without him, I’m not sure if I’d be having as much fun right now.  And he’s got a very kind, loving and generous wife.  For two years straight, I’ve attended the convention stag.  I’ve never been able to bring my wife, which makes it weird showing up at a party solo.  Both years, Gerry found me and invited me to sit at his table. I always enjoy chatting with him and his partner, Richard.  In reality, there’s only a handful of competitors that are serious players in the industry. Nehra and Waak are two of them.

          By far, The most moving moment was when Rich DeVos welcomed his two boys, Rich and Doug, into the DSA Hall of Fame. I’ll be honest….I shed a tear or two. As a father of three children, I was simply amazed at the unique moment Rich DeVos got to share with his two sons. It made me assess my path and wonder if I was on track to leave a lasting legacy for my children as Rich has done for his. With Rich on stage, telling stories about the start of Amway, and seeing the pride in his eyes when his boys took the stage…it was just awesome. I recorded his speech, without permission. I’m not sure if that’s ok. But until someone says otherwise, check it out below.

          This is my full library of pictures from the DSA event.  Unfortunately, I didn’t take very many.

          Pokorny / Amway Settlement Explained

            Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

            It’s official. The long fought Pokorny Class Action lawsuit has finally been resolved. Unlike the last Pokorny / Quixtar settlement, which was delayed by the judge (or denied, depending on who you ask), this one seems to be sticking. If you were a Quixtar IBO between January of 2003 to February of 2012, you might be eligible to take a slice of the settlement pie. The official settlement page with instructions can be found here. I’ve summarized the key ingredients of the settlement below. I’ve also included direct quotes from the settlement beneath my summary.

            If you learn something here, show some google love and hit the +1 button above.

            In Summary

            Amway must:

            1) Provide 90 refund period for registration fees;
            2) On registration forms, explain that income claims provided to prospects represent gross, not net income; explain the availability of free training; explain the refund policy; explain the availability of retail prices on-line;
            3) Maintain policies prohibiting tactics which require people to buy tools (Business Support Materials, or “BSM”) upon enrollment;
            4) Enforce its retail sales rule. As stated in the settlement, they must use “reliable reported levels of sales to end-user consumers.”;
            5) 5% price reduction from the 2007 pricing levels;
            6) Increase its IBO training budget by $7M over 2007 levels. Such training must be provided for free to its IBOs;
            7) Maintain and enforce quality control over BSMs. The standards must prevent BSMs from making misrepresentations about the Amway business;
            8 ) $55M in economic relief with $34M going to a cash (reimbursements) fun and $21M going towards a product credit fund (free schwag);
            9) With the cash fund, Amway must provide a cash payment of up to 20% of the IBO’s “verifiable net BSM expenditures.” The cash payment is capped at $2,000. In other words, if you spent $10,000 on tools between 2003 and 2012, you could be eligible for a $2,000 check.
            10) Upon a showing of a Special Hardships i.e. bankruptcy attributable to Amway or a loss of at least $10,000, an individual can be eligible for more money (with a $10,000 cap).


            5.1.1 Quixtar shall modify its agreements with its IBOs to provide not less than a 90-day refund period for registration fees. The 90-day refund period for an IBO’s registration fees will begin from the time that Quixtar receives the registration fee from the IBO.

            5.1.2 The application form that new IBOs are required to execute to register as a Quixtar IBO shall disclose the following information: (a) that income figures provided to potential IBOs represent gross, not net income; (b) the availability of certain free company provided training for IBOs in marketing and merchandising; (c) Quixtar’s refund policies for products purchased by IBOs; (d) the availability of a retail product price list schedule accessible on-line; and (e) that product purchases and purchases of BSM are optional.

            5.1.3 Quixtar shall: (1) not compensate any IBO primarily for the act of recruiting or registering other IBOs; and (2) not require any IBO to purchase or maintain any specified amount of inventory of products or BSM. In addition, Quixtar shall maintain policies prohibiting acts or practices which require a person to buy BSM as a condition to becoming an IBO and prohibiting acts or practices which discourage buy backs of product on commercially reasonable terms. In addition, when making sales based bonus payments or incentives to IBOs who are below the Platinum PIN level, Quixtar will emphasize consumer sales by conditioning such bonus payments and incentives on reasonably reliable reported levels of sales to end-user consumers. (The phrase “end user consumer” means any individual who intends to use or uses Quixtar products.) Quixtar shall maintain policies prohibiting Quixtar, its IBOs, and companies that are authorized by Quixtar to provide training and support to IBOs from making statements or representations or taking actions contrary to (i) the application form referenced in Paragraph 5.1.2 above; (ii) the requirements of applicable state and federal law; or (iii) the requirements of Paragraphs 5.1.2, 5.1.3, or 5.1.6 of this Settlement Agreement. Quixtar shall not be liable for contempt of the Consent Judgment solely on the grounds that Quixtar’s policies are breached by its IBOs or others.

            5.1.4 Quixtar will maintain for twenty-four months from the Effective Date or from June 30, 2011, whichever occurs first, a price reduction that averages at least 5% from January 2007 pricing levels to distributors across Quixtar-branded products (existing SKUs, excluding freight). . . .

            5.1.5 Quixtar will increase its annual IBO training budget for product, product merchandising, business skills . . . by an average of $7 million or more over 2007 levels for twenty-four months from the Effective Date . . . such training to be provided free to IBOs.

            5.1.6 Quixtar will maintain and enforce quality control over BSMs that are: (1) sold or distributed by Quixtar IBOs or by companies authorized by Quixtar to provide training and support to IBOs and (2) sold or distributed in a manner suggesting sponsorship, affiliation or approval by Quixtar. Quality control shall include standards that are designed to prevent BSMs from making factual assertions regarding the Quixtar business that contain either material misrepresentations or omissions that render a statement materially misleading. Quality control shall provide that BSMs comply with the standards and policies contained in Paragraphs 5.1.2, 5.1.3, and 5.1.6 of this Settlement Agreement. . . .

            . . .

            5.2 Economic Relief Quixtar shall provide a total of $55 Million in direct economic relief (in addition to the economic value to the Settlement Class of the injunctive relief described in Subsections 5.1.1-5.1.6 above). The $55 Million in direct economic relief shall constitute a common fund composed of: (1) a $34 Million Cash Fund; and (2) a $21 Million Product Credit Fund.

            5.2.1 $34 Million Cash Fund: within ten (10) business days after entry by the Court of the Preliminary Approval Order, Quixtar shall deposit the sum of thirty-four million dollars ($34,000,000.00) (the “Cash Fund”) into an interest-bearing escrow account for an anticipated distribution to Settlement Class Members and to pay administrative costs, costs of class notice, and attorneys’ fees and expenses pursuant to this Settlement Agreement and the Court’s orders. . . .

            5.2.2 $21 Million Product Credit Fund: Quixtar shall provide $21 Million in free product for benefit of the Settlement Class (“Product Credit”). . . .


            6.1 Cash Fund. The $34 Million Cash Fund shall be distributed as follows:

            6.1.1 Cash Payments. Subject to other terms herein, Settlement Class Members who are former IBOs as of the date of this Settlement Agreement, including the named Plaintiffs, with the exceptions set forth below, who have at least $100 in Verifiable Net BSM Expenditures are entitled to a cash payment of up to 20% of their Verifiable Net BSM Expenditures, up to a maximum recovery of $2,000 per claimant, or an appropriately pro-rated amount under Paragraph 6.1.4. To obtain this cash refund, Settlement Class Members must submit to the Claims Administrator the approved Claim Form together with documentation of their Verifiable Net BSM Expenditures within a 90-day refund period as specified in the approved form of Notice. The Claims Administrator may accept receipts, credit card records, or other proof of purchase as documentation.

            6.1.2 Special Hardships. Settlement Class Members who are former IBOs as of the date of this Settlement Agreement, including the named Plaintiffs, who either (i) can show that their recruitment into and operations of their Quixtar business caused them to file for personal bankruptcy or (ii) can show a loss of at least $ 10,000 from operating their Quixtar business, may apply for a special hardship award not to exceed 20% of their loss. A Special Master, who shall be appointed by the Court with input from Plaintiffs’ Counsel and Quixtar at the time of final approval of the Settlement Agreement, shall determine whether each claimant for a special hardship award has made this showing. The Special Master shall then prepare a schedule of recommended special hardship awards, if any, to each claimant and submit the schedule to the Court for final approval of the awards. The special hardship awards shall be governed by the following:

            a. No individual shall receive a special hardship award greater than $ 10,000.

            . . .

            Full Settlement Below

            Quixtar / Pokorny Settlement Agreement

            VanderSloot Denies Melaleuca Operates as a MLM

              Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

              SMH.  It’s a new acronym I’ve recently learned.  It means “Shaking My Head.”  And that’s what I immediately did when I read about Melaleuca’s CEO, Frank VanderSloot, denying all ties to the MLM industry.

              While it certainly seems like a ridiculous exercise, I list a few obvious reasons in the video why VanderSloot is wrong to make such a distinction.

              In the video, I reference his statement to the press (included below). I also reference the FTC’s definition of a “Multilevel marketing program” as per the FTC vs. FUTURENET case.

              Note, this is not a controlling definition given the circumstances of the case; however, it gives us a good idea of how the FTC defines a MLM.

              FTC’s definition:

              “Multi-level marketing program” means any marketing program in which participants pay money to the program promoter in return for which the participants obtain the right to (1) recruit additional participants, or to have additional participants placed by the promoter or any other person into the program participant’s downline, tree, cooperative, income center, or other similar program grouping; (2) sell goods or services; and (3) receive payment or other compensation; provided that: (a) the payments received by each program participant are derived primarily from retail sales of goods or services, and not from recruiting additional participants nor having additional participants placed into the program participant’s downline, tree, cooperative, income center, or other similar program grouping; and (b) the marketing program has instituted and enforces rules to ensure that it is not a plan in which participants earn profits primarily by the recruiting of additional participants rather than retail sales.”

              Essentially, it boils down to whether there’s a recruitment component to a pay plan. If there’s an an opportunity for an override commission from downline productivity, where participants can sponsor other participants and earn income from their sales, it’s a MLM. Using the factors above, and some of the obvious factors referenced in the video, Melaleuca would clearly qualify as a MLM. There’s an enrollment fee that gives people the right to sponsor other participants (element #1) and the right to sell products (element #2), which gives people the ability to receive payment for product volume (element #3) assuming the commissions are not driven by enrollment fees.

              VanderSloot’s Statement

              (emphasis mine)

              “It’s unfortunate that someone would suggest that Melaleuca is something like Amway. It’s not. We started Melaleuca 26 years ago to market environmentally responsible products and to provide a business opportunity for folks who weren’t successful in climbing the corporate ladder and didn’t inherit wealth from their parents. We try to be champions of the little guy. My father was a little guy. And I still see myself as a little guy.

              Contrary to those who do not know us, our business model is nothing like Amway or Herbalife. I challenge anyone to find any similarity whatsoever. There is no investment of any kind unless you want to call a $29 membership fee an “investment.” And anyone can get a refund on that by just asking.

              We do offer a home-based business opportunity. But it is no “pyramid scheme.” We have long been critical of the many MLM/pyramid schemes operating in this country. I agree with those who say that typical MLM companies destroy people’s finances. Most are designed to attract people to “invest” in large purchases with the promise of “getting rich” quickly by getting others to invest. The guy at the top always wins and the guy on the bottom always loses.

              In Melaleuca’s case there is no investment and no getting others to invest. We do pay commissions to those who have referred customers based on what those customers purchase. There is really no way to lose money on referring customers. And there’s no way for customers to lose either when they’re buying high-quality products at grocery store prices. Customers just order the products they use every month directly from the factory. We have hundreds of thousands of customers who buy from us each month. They don’t ever resell anything. They don’t invest in any inventory. There can be no pyramiding without some kind of investment. In 26 years, no one has ever complained that they lost money. It’s simply not possible.

              Our business model works pretty well for most folks. We have already paid over $2.9 billion in commissions to households across the country. Our mission is to enhance lives by helping people reach their goals regardless of their beliefs, backgrounds, or affiliations. Last month we sent out almost 200,000 checks to American households alone. Members of those households tell us we are doing a pretty good job achieving that mission.”

              USA Today Reports on MLM: point for point response

                Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

                Photo by @w3inc via Flickr

                Over the past year, USA Today has taken a special interest with the MLM model. They’ve published a number of articles skeptical of the MLM model and usually reference examples from Fortune Hi Tech Marketing. Recently, they published an article titled “Many in multilevel marketing sales find it hard to earn much.” The article focuses on some legitimate concerns with the MLM model and I address them point for point below. However, it’s not entirely fair to focus on the challenges facing the model without mentioning the positives. When done right, direct sales offers people with an unmatched opportunity to change their finances. There’s a low-cost of entry, people can represent exciting brands and unique items, they can sell those products for profit and they can build large sales teams and earn override commissions on downline performance. If the product is marketable and the compensation plan fair, it gives the average person a chance to change their life. Is it tough to make it in the MLM space? Absolutely. It’s damn hard to make it in sales and it’s damn hard to achieve anything significant in life. Are there companies out there exploiting the model and harming people? Yep. It’s why I sued a company last year. But the fact of a few bad apples should not impugn the entire MLM space. In reality, it’s challenging to win in any endeavor, including business. In the MLM space, it takes strong sales skills (which can be developed) and a lot of work.

                Comments about the article

                The picture

                In the image of the victims in the article, there’s a VHS tape. Who in the world still sells VHS tapes!? This initially made me wonder how recent the couple was involved with Amway. And then I continued to read and discovered that they quit the business in 2000! Seriously!? If the author was trying to make a point about Amway by talking about “victims,” it would have been a lot better to get some quotes from a more recent example.

                Pokorny echo

                The article reiterates some of the same points discussed in the past about the Pokorny class action lawsuit. Amway has already taken a beating on these very issues and most of the issues referenced in the article have already been addressed by Amway. The article references tool companies, which was the main point of contention in the Pokorny class action case. Gerald Nehra, another MLM attorney and one I hold in high esteem, was quoted in the article. The article states:

                The sale of training materials has to be a “very small” part of distributors’ businesses, or “people will focus more on that aspect of the business than on the aspect of selling products to customers,” says Gerry Nehra, a Michigan attorney representing multilevel marketing companies and former director of the legal division of Amway from 1982-91. Nehra, who would not comment on Amway specifically, says that when selling training materials becomes the focus, the business becomes “overly dependent” on recruiting more representatives, which raises questions about whether a company is a pyramid scheme.

                It was a good summary by Nehra. When the vast majority of funds are made via tool sales, the economic pressure forces people to focus almost exclusively on recruitment (who need more training), which lead to sustainability issues and cultural problems within the organization. It’s a large issue being dealt with by multiple companies in the space right now. But this is old news.

                Likelihood of Success

                The article states:

                Even proponents of multilevel marketing say the cases and probes underscore one of the growing problems in the industry: It can be very difficult, if not impossible, for most individuals to make a lot of money through the direct sale of products to consumers. And big money is what recruiters often allude to in their pitches.

                “Ease of earning an income” is never a factor when determining if a company is a pyramid scheme or not. One of the greatest things about the industry: ease of entry. One of the worst things about the industry: ease of entry. Because it’s so cheap and easy to join a MLM, the vast majority of participants do nothing and never earn an income. It’s not because the model is unfair, it’s largely because the vast majority of participants DO NOTHING, which skews the income averages down. The issue referenced in the article centers on one thing: managing the expectations of prospects before they join. This highlights the importance of using a good income disclosure to make sure the prospect is fully informed of the data before making a decision.

                Price competitiveness

                The article states:

                With the growth of discounters including Walmart and retail websites, few people need to buy toiletries, detergent or vitamins from a friend or neighbor, especially with the higher prices charged so all the commissions can be paid. Making money by recruiting more people, selling them training materials and persuading them to buy products can become the only way to make much money at some of the companies.

                I’ve written about this in the past. The above paragraph is absolutely true. And it’s why most MLMs avoid selling cheap, commodity products. I think it’s safe to say that the vitamins at Wal Mart are not the best in the market. They’re targeting a different demographic and offering a different value proposition. The MLM space is designed to introduce unique products and services into the marketplace. The keyword is VALUE. If there’s legitimate demand for the product being sold at the price requested, and the margin is sufficient for the company to support a MLM compensation plan, the above quote about big box stores is irrelevant. However, if the product is UNmarketable and UNcompetitive with alternative products in the marketplace, then the company is relying on “opportunity driven demand” (i.e. the compensation plan) and the distributors are forced to focus almost exclusively on recruitment and internal consumption. It happens. But just because it happens does not mean it’s representative of the entire space. The above quote paints the entire MLM space with a broad brush. Smart companies are NOT trying to compete with Wal Mart. When it comes to cheap goods, Wal Mart has that space covered. But when it comes to premium products with incredible health benefits, great MLMs shine. I’ve written about this concept a year ago about the importance for MLM companies to constantly innovate. In order to avoid the market catching up and offering comparable items at cheaper prices, the MLM executive team needs to stay one step ahead of the curve to keep their distributors armed with marketable items.

                Distribution system / Amway’s revenue increase

                The article states:

                Roland Whitsell, a former business professor who spent 40 years researching and teaching the pitfalls of multilevel marketing, says it’s little surprise Amway’s big growth is now outside of the U.S. He says the “direct selling” in multilevel marketing is needed in countries with “primitive distribution systems and limited choices in retail stores,” but its potential is “seriously limited” here.

                Lieberman notes the company is “extremely successful in formerly communist countries and in developing countries.” Sales were also up last year in the U.S. by about 5%, he says.

                Regarding Rolan Whitsell’s quote, he’s certainly entitled to his opinion. However, network marketing is not just about the physical distribution of product. Are there more efficient means of delivering goods in the market? Sure. It’s easy to place an order on and have it on your doorstep within a day. However, Rolan Whitsell is willfully ignoring one of the most valuable functions of a good MLM: engaged sales force telling the product story! Some products are so new, so far ahead of the curve, there needs to be a person-to-person interaction before a consumer will make a decision. I have a client that recently sold its product through Kohl’s, a popular retail outlet. They soon discovered that the product only sold well when it was demonstrated and sampled; hence, their entry into the direct sales space. Did they have a shipping problem before they started their MLM? No. They had a marketing problem, which is one of the benefits of leveraging the MLM model when selling unique products and services. Rolan’s quote completely ignores this important function. Wal Mart is not in the business of selling premium cookware, yet Pampered Chef is worth over $1,000,000,000. Selling is more important than shipping.

                As for Amway’s report about a 5% increase in revenue, if they actually grew in 2010, they’ll be dramatically ahead of the curve. This is the first report I’ve seen about a company’s performance in 2010. I’ll report findings from the other companies as they’re published.

                Cost of doing business

                The article states:

                Wittlich says he worked day and night on his Amway business and never made a profit. “Active” Amway distributors earn an average of just $115 a month, according to Amway’s latest disclosure statement. Just a quarter of 1% (0.26%) make more than $40,000 a year, which Amway attributes to the fact many work part time.

                See my original comments about Wittlich. He quit the business 10 years ago! What insight could he possibly provide about Amway’s business model today? Also, see my comments about the greatest thing and the worst thing about direct selling companies: the ease of entry. The majority of people do nothing, which skews the numbers down.

                More about tools

                The article quotes Lou Abbott, author of MLM: the whole truth. The article states:

                Abbott says nearly all multilevel marketing companies prohibit distributors from selling “tools.” When they are allowed, the products are supposed to be sold at cost. He notes $8 DVDs are a “profit center” when they cost “25 cents” to produce.

                This is not entirely accurate, although I can see how Lou would reach this conclusion. It’s perfectly fine for tool companies to profit handsomely from the sale of tools. If there’s a market for the material, the creator can sell the items at whatever price the market will bear. The rub comes into play when there’s a financial opportunity associated with the selling of tools, which turns into a MLM on top of another MLM. And with the competing interests, the model with the stronger pay plan gets the most focus, which is usually tools.

                Indicators for the future

                The article states:

                Stuart Singer, a partner at Boies Schiller & Flexner, one of the law firms that represent the class-action plaintiffs, hopes the Amway settlement, if approved by a judge, will have a beneficial effect on the industry.

                “If Amway recognizes the need to transform their business, then I think the other companies that are involved in multilevel marketing will have to follow suit,” he says. “It’s just a matter of time.”

                We can hope. The space will never “go mainstream” until the space gets serious about quality control. As an industry advocate once said, people are burying their faces in piles of money and they’re doing nothing to address the obvious problems. Until the bad companies are routinely weeded out, they’ll continue to burn through people at an alarming rate and create another generation of skeptical MLM participants. The solution lies in incentivizing on customer sales.


                In order to genuinely improve the space, it’s important to honestly acknowledge some of the challenges. The negative truth always stings more than the negative lies. While the USA Today article was clearly biased, she raises some valid concerns that can be easily addressed. What do you think about USA Today’s article? Do you disagree with any of my points above?

                Amway / Pokorny class action settlement denied

                  Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

                  Special thanks goes to IBOFIGHTBACK, author and owner of the pro-Amway website, The Truth About Amway, for providing the tip and sharing the below court decision.

                  UPDATE: Upon receiving information, the settlement was not technically “denied.” Although it was “not approved,” it does not equate to a denial. It appears that the settlement will eventually occur; however, the judge is demanding more information.

                  Recently, Amway settled a number of disputes. One of the settled lawsuits was the Pokorny class action case. The Pokorny case, in my opinion, was Amway’s largest problem. In November of 2010, Amway settled the Pokorny lawsuit. Terms of the settlement were basically as follows:

                  • 90 day refund period for new registrants
                  • Additional disclosures for prospects
                  • Offer free training on product sales and ethical business practices
                  • Maintain and enforce “quality controls” over tool companies
                  • Lowering their prices by 5%
                  • …..and a $34M cash fund for class members AND lawyer fees.

                  Plaintiffs’ counsel was to receive $20M of the cash fund. Remember, the cash fund was created to benefit the class members. And if you believe that, I’ve got some ocean property for sale in Arizona.

                  In the Ninth Circuit, the judge has to approve all class settlements. It actually makes sense. As explained by the judge in the quote below, the class members are never at the table to negotiate for themselves. If you read the entire order, which I would NOT recommend because it’s really boring, the judge cites his reasoning for denying the settlement attempt. He wants more information about the plaintiffs’ attorneys competency, which I thought was humorous. Plaintiffs’ counsel in this case is as high-profile as it gets. He also wants more information about the amount of tools the class participants would customarily purchase. He also wants to learn more about the size of the class.

                  Those questions will easily get answered in the briefing, as he requested. The most important part of the decision is quoted below. It’s about fairness. In summary, he does not seem thrilled that the attorneys are walking away with 2/3 of the cash pot while the remainder of the class, which could number into the tens of thousands, will receive some product coupons and a refund on their registrations (if they qualify). What do you think? Does the decision make sense? The entire decision can be found at the end of the article.

                  Key quote

                  The Ninth Circuit has warned that “there are real dangers in the negotiation of class action settlements of compromising the interests of class members,” because “[i]ncentives inherent in class-action settlements” can “result in a decree in which the rights of [class members, including the named plaintiffs] may not [be] given due regard by the negotiating parties.” Staton, 327 F.3d at 959 (internal quotation marks omitted). These incentives stem from the fact that “[t]he class members are not at the table; class counsel and counsel for the defendants are.” Id. This can “influence the result of the negotiations without any explicit expression or secret cabals,” and is why “district court review of class action settlements includes not only consideration of whether there was actual fraud, overreaching or collusion but, as well, substantive consideration of whether the terms of the decree are ‘fair, reasonable and adequate to all concerned.'” Id. at 950 (citing Officers for Justice v. Civil Serv. Comm’n of San Francisco, 688 F.2d 615, 625 (9th Cir. 1982)). Due in part to these dangers of “collusion between class counsel and the defendant,” the Ninth Circuit has adopted the rule of other circuits that “settlement approval that takes place prior to formal class certification requires a higher standard of fairness,” leading to “a more probing inquiry than may normally be required under Rule 23(e).” Hanlon, 150 F.3d at 1026.

                  The Court first notes that many of the hallmarks of collusive unfairness are present in this Settlement Agreement. Defendants agree to not oppose an attorneys’ fees motion by Plaintiffs’ counsel for as much as $20 million. If the Settlement and the contemplated motion for attorneys’ fees are approved, nearly two-thirds of the $35 million Cash Fund would be awarded to Plaintiffs’ counsel. The parties appear to justify the size of this proposed award by agreeing that the injunctive relief in the Settlement is valued by the class at $100 million. The Court has difficulty accepting this estimate as fact — the parties offer no evidence in support of this estimate, nor do they attempt to justify it through attorney declarations. Many of the Court’s criticisms of the parties’ motion for class certification also apply to the proposed settlement. For example, it is not clear that the settlement will fairly compensate all class members. . . .

                  End quote

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                  Amway Settles Multiple Disputes

                    Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

                    The weather is cooler, the leaves are falling, the holidays are drawing near….peace is in the air. In the span of a few days, Amway has made two HUGE announcements about the settlements of pending lawsuits between itself and multiple parties. First, they announced the settlement between themselves and MonaVie, which was anticipated to be an epic battle between the MLM giants. Click Amway v. MonaVie to read the original complaint. In the lawsuit, Amway alleged MonaVie was using unfair marketing practices while raiding Amway’s downline.

                    In the same announcement, Amway announced a settlement with Orrin Woodward and TEAM. The Amway / Woodward / Team litigation has been insanely intense since August of 2007. I was there for the start and I’m certain there’s much relief on both sides as a result of the settlement. The Amway / Woodward litigation produced a cutting edge court opinion about the limits of First Amendment protection for anonymous bloggers that disparage a company. Click here for the opinion.

                    Second, Amway announced today of its settlement of the Pokorny class action lawsuit. News of this settlement is not really surprising given Amway’s loss over its arbitration provision back in April of 2010. This was a very contentious case and Amway’s exposure was substantial. Due to the size of this settlement, I anticipate more lawsuits like Pokorny will be filed against other MLMs that rely heavily on tool companies. It’s ok to work with tool companies; however, when the tail starts wagging the dog, it can lead to HUGE, Pokorny-like problems.

                    The past few years have been busy for Amway as they’ve made some efforts to clean up their house. They’ve lowered prices, implemented quality control standards for the tool companies, invested more in IBO training and….settled their lawsuits.

                    The real losers as a result of these settlements…..THE LAWYERS.

                    What do you think about this news of the settlements?

                    MLM Training and the Importance of Competency

                      Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.


                      it’s simultaneously the most important AND least talked about aspect in the direct selling industry. The relationships that develop between participants while building their businesses is the most important component that makes our industry special. And those relationships are solidified via training. It’s unique to the direct sales industry where sponsors are obligated to train and mentor their recruits about selling and team building. It’s through these deep relationships between participants that cultures and brands are built.

                      Some companies allow high level distributors to create training programs for their downlines. These are referred to as “tool companies.” I was baptized in the industry representing Orrin Woodward’s tool company, Team, when he was affiliated with Amway and subsequently MonaVie. These training programs are designed to offer plug-and-play solutions for new distributors…distributors are given the choice of plugging into the training program and receiving the tools necessary to build profitable businesses.


                      When companies allow distributors to create tool companies (not all of them do), there’s usually a qualification that needs to be met before they can begin promoting their program. The qualification is one that usually separates the professionals from the amateurs and it ensures that the best networkers, the networkers with real results (not theoretical), are the ones influencing the next generation of leaders. It makes sense to have high standards. When the value of a company’s brand lies in the hands of its distributors, they have a significant interest in ensuring their trainers are actually competent.

                      I’ve beaten up on MonaVie recently. When they led with a hand gun instead of a handshake and threatened a friend with a lawsuit, I was not impressed. Setting it aside, I want to highlight something they do really well: they only let highly qualified networkers run tool companies.

                      When Orrin Woodward transitioned over to MonaVie, we were never allowed to sell a single CD until after he reached the Black Diamond status. The bar was set, it was the same for everyone, and he had to jump over it like everyone else.

                      Lately, I’ve seen multiple tool companies pop up from distributors with minimal experience and small organizations….and their MLM companies allow it. These tool companies (which I will not reference by name) make the rookie mistakes of promising easy money. The pitch is always the same: “We’re going to use more social media….We don’t sell products….We just host conference calls….Just enroll three people and your business explodes….We just drive traffic to websites.” The end result is predictable: an inactive sales culture where the participants enroll with a lottery mentality and sit and wait for others to lead. True professionals in the space never make this mistake. They’re up front with the work requirements and they create duplicatable patterns that can be copied by anyone. When the rookies tell everyone “this is easy,” at some point boots need to hit the ground and when it’s time, they’re shocked that nothing happens.

                      Message for executives

                      When the value of your brand rests in the hand of your representatives, I would advise you only pass the megaphone to your most experienced sales reps. Simply because I’ve seen surgery on TV does not make me qualified to do the real thing. If you allow amateurs to create programs and hold themselves out as ambassadors of your company, you might develop a cancerous sales culture that could, and probably will, lead to hype, inappropriate product and income claims and trouble.