'Gotchas' — What to Watch Out for in Home-Based MLM Businesses

Suzie has worked hard at her job for many years, but there always seems to be too much month at the end of her money. She does not see how she will ever get ahead of her debt, let alone make any of her dreams for her growing family a reality. 

One day, Suzie finds a home-based business that promises her wealth very quickly and the ability to work around her kid’s schedule. She is so excited by their motivational presentation that she gives her job notice.  

After a few months of investing thousands of dollars but making almost nothing, Suzie realizes that she has made a mistake. Unfortunately, the new company’s “buy back” policy proves to be a sham, forcing her to beg her old company for her job back (which they give her, and at a lower salary). 

Suzie is now worse off than when she started. Will she learn from her mistakes, or will she give up on her dreams forever?

A home-based business is the dream for many people, working a 9 to 5 job that doesn’t make them happy. You get to provide goods and services that people enjoy, bring home far more than any hourly wage, and do work that you love. Most of all, you can do all of that from the comfort of your own home without having to step outside into the cold. 

What should you look for in a home-based business? There are many good companies and products out there, but it can be challenging to know which ones to choose. One way to tell them apart is to know what to look out for in a home-based business: that is, which ones to avoid. 

When some people hear the term “home-based business”, they think of network marketing or multi-level (MLM) companies in which you become a distributor of their products or services. You’ll often see recruitment ads that use the words “home-based business” as part of the pitch.  

Most “home-based businesses” promise the notion of unlimited growth potential. The more products or services you sell and the more people you recruit into your downline, the more money you make. However, some of these companies have “gotchas” built into their compensation plan to hurt the “little guy” and pass the income to the “big guys” at the top. 

Here are some examples: 

• Binary Compensation Plans with a Runaway Leg. This is where the leadership of a home business makes their reps feel like they have a huge business under them, but in reality, they’re not really making that much money from it. The rep continues to buy overpriced goods and services, thinking that one day they will match the bigger leg and find a golden pot at the end of the rainbow and they are afraid (fear of loss) to lose it. It will never happen because you can’t catch up with a runaway leg. 
• Buy-Ins: You have to buy in to have an unfair advantage. You can make more money if you pay more to join. That should be a big red flag.
• Fake Inventory. This happens when you’re buying your own promotion for the month, but if you add up what everyone purchased, the amount of money they made together is less. Another term for this is “garage qualifying”: that is, qualifying for a promotion by buying your own stock and filling up your garage with it. 
• Overpriced Products. Products should cost what the market bears. A high-end coffee should still not cost more than other high-end coffees. If it does, it’s not a real business with real products that people really want. 
• Familiar Faces at the Top. If you’ve noticed that your MLM’s leadership is made up of people who used to be part of other MLMs that have since gone under, that’s a good sign that they failed to run those other companies properly. That is not the kind of company you should join. Instead, look for leaders who have been in their company for a while with a track record of success or who have experience running big, successful traditional companies that are still around.