How to Research a Network Marketing Company Before You Join
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How to Research a Network Marketing Company Before You Join
Knowing how to research an MLM company before you join can save you money, time, and relationships. The process takes a few evenings, not weeks: read four documents, run five searches, and ask the right people the right questions. This guide walks through that due diligence step by step, using the same questions the FTC recommends to anyone considering a multi-level marketing opportunity.
Key facts
- Documents to read: compensation plan, income disclosure statement, policies and procedures, distributor agreement
- Where to check complaints: your state attorney general and the FTC’s case library
- Typical outcome data: in AARP Foundation’s 2018 survey, 47% of MLM participants said they lost money and 27% broke even (AARP)
- FTC’s core warning sign: promoters who emphasize recruiting over selling to real customers (FTC)
Step 1: Read the Four Core Documents
Ask the person recruiting you for these, or find them on the company website. A legitimate company should make all four available before you pay anything.
- Compensation plan. How are commissions calculated? Is there a monthly personal volume requirement? Do you have to recruit to reach meaningful pay levels?
- Income disclosure statement (IDS). What did the median participant receive last year? Does the document include everyone who signed up, or only “active” members?
- Policies and procedures. What are the rules on inventory, returns, social media, and income claims?
- Distributor agreement. What are you signing? Look for cancellation rights, buyback terms, and any non-compete clauses.
If you’d like to see how we turn these documents into a full review, read our MLM company review checklist.
Step 2: How to Research an MLM Company’s Legal Record
Search the company name together with “FTC,” “attorney general,” “lawsuit,” and “class action.” Check the FTC’s legal library for cases and your state attorney general’s site for complaints. The FTC notes that a lack of complaints doesn’t guarantee legitimacy, but complaints can reveal patterns. Read the actual documents where possible: a complaint is an allegation, while a judgment or stipulated order is a resolution, often without an admission of wrongdoing.
Also check whether the company received the FTC’s October 2021 Notice of Penalty Offenses concerning money-making opportunities. More than 1,100 businesses, including many direct sellers, received it. Receiving the notice isn’t evidence of wrongdoing, but it means the company was formally told that deceptive earnings claims can trigger civil penalties. Our guide to MLM regulations and the FTC explains why that matters.
Step 3: Evaluate the Products as a Customer
Ask yourself whether you would buy the product at its price if there were no business opportunity attached. Compare it with similar products in stores or online. The FTC’s consumer guidance warns that some MLM goods are overpriced or carry unproven claims, and that health products advertised with “miracle” ingredients deserve particular skepticism. If most sales seem to go to participants rather than outside customers, that is worth noting.
Step 4: Add Up the Real Costs
Starter kits are only the beginning. Build a simple 12-month budget that includes:
- Starter kit or enrollment fee
- Monthly product purchases needed to stay “active” or qualified
- Website, app, or back-office fees
- Training materials, events, and travel
- Samples, shipping, and party or marketing costs
Then ask what happens to these costs if you quit. Is there a buyback policy for unopened inventory, and on what terms? The FTC advises getting the refund policy in writing.
Step 5: Questions Before Joining an MLM
The FTC suggests asking current and former distributors detailed questions. These are the ones that tend to reveal the most:
- How much did you make last year after expenses?
- How much inventory did you buy, and did you sell all of it?
- What share of your income came from selling to people outside the company?
- How many people have you recruited, and how many are still active?
- Have you borrowed money or used a credit card to fund the business?
- How many hours a week do you spend on it?
Talk to at least one former distributor who isn’t in the recruiter’s upline. Their view is often the most useful.
Step 6: Check if an MLM Is Legit Using Red Flags
The FTC lists warning signs of a pyramid scheme: extravagant earnings promises, an emphasis on recruiting as “the real way” to make money, high-pressure tactics, and distributors buying more product than they can use or sell just to stay qualified. Others to watch for include recruiters who won’t name the company up front, required purchases tied to rank, and lifestyle posts featuring cars or vacations. The FTC treats lifestyle imagery as an implied earnings claim.
Key Takeaways
- Read the compensation plan, income disclosure, policies, and agreement before paying anything.
- Search regulatory and legal records, and separate allegations from outcomes.
- Judge the product as a customer and budget a full year of costs.
- Ask current and former distributors about net earnings, inventory, and retail sales.
Frequently Asked Questions
How do I know if an MLM is legit?
Look at how money is made. In a legitimate structure, you can earn from selling products to real customers without having to recruit. Red flags include required monthly purchases to qualify for pay, emphasis on recruiting, income promises, and pressure to join quickly. Review the income disclosure and legal history too.
What questions should I ask before joining an MLM?
Ask what current distributors earned last year after expenses, how much inventory they bought and sold, what share of income came from outside customers, how many recruits stayed active, and whether they borrowed to fund the business. Ask for the company’s refund and buyback policy in writing.
Where can I check complaints about an MLM company?
Check your state attorney general’s website, the FTC’s legal library of cases, court records, and news coverage. Search the company name with words like review, complaint, and lawsuit, as the FTC suggests. Remember that a complaint is not a finding of wrongdoing.
How long should MLM due diligence take?
For most people, a few evenings is enough to read the core documents, run searches, and talk with two or three current and former distributors. Be cautious of anyone who says you must decide immediately; the FTC lists high-pressure tactics as a warning sign.
Sources
- FTC Consumer Advice: Multi-Level Marketing Businesses and Pyramid Schemes
- FTC: Business Guidance Concerning Multi-Level Marketing
- FTC: Notices of Penalty Offenses (Oct. 2021)
- AARP Foundation: Study of Multilevel Marketing (2018)
QastMe does not endorse any company. Information is for education only and is not financial or legal advice. Earnings in direct selling vary widely, and most participants earn little or no money. Review each company’s income disclosure statement before deciding.
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