People often ask me “How do you determine the value of your MLM Business?” Personally, I think this is a very important question to answer.
Although I am not an accountant or attorney, I am a Certified Business Coach, and I can give you a few pointers to determine the value of your MLM Business.
As a quick disclaimer, if you are thinking about buying or selling your MLM Business, you might want to talk to a CPA or attorney to get their input as well, so you can make informed decisions.
That being said, this is how I would determine the value of a MLM Business:
STEP # 1: Find Out Why They Are Selling
Ask the person WHY they want to sell their downline. Are they leaving the industry for good? Are they going through a divorce? Are they in a money crunch? Is the company in trouble? Or is it something else?
They might not tell you the truth about why they are selling, but try to get a good idea anyway. This will help you find out if they are a MOTIVATED seller and if it will be easy to negotiate with them.
STEP # 2: Review the Last 3 Year’s Earnings
The first thing I would do is look at the last three year’s earnings. Get a copy of the distributor’s past three tax returns or past three year’s 1099-MISC form. Find out the commissions paid to them and try to go into greater detail to get a breakdown of the earnings. If possible, find out their net income after business expenses, not just the amount of commissions they received.
STEP # 3: Calculate the Value
Your next step is to calculate the value of the MLM Business. In most cases, this will be one or two times the yearly earnings. For instance, if they received $100k in yearly commissions, the business would be valued between $200k and $400k (my opinion).
STEP # 4: Negotiate and Agree on a Price
As a buyer, you will want to negotiate and get the best price possible. It’s perfectly okay to haggle with the seller so you can get a price you are both happy with.
As a seller, you want to educate yourself so you don’t “give the business away” or sell it far below its fair market value.
Once you agree on a price, you simply need to sit down with your attorney, sign the paperwork and transfer ownership.
Remember, a business is only worth what someone else will pay for it! Just because you think your business is worth XXX amount of dollars doesn’t mean it is to someone else.
Here are a few additional things to consider when you are determining the value of a MLM Business.
1. Growth Rate – Has the downline grown each year? How much has it grown each year over the past three to five years? You want to look for a distributorship that is growing each year, not shrinking.
2. Size of Downline – How big is the downline? How many customers and distributors are there? How much volume is being generated each month?
How many distributors are on auto-ship? How many distributors are active and sponsoring new people each month? How many RETAIL customers are there?
Finally, how many leaders are there in the downline at each rank? Do these leaders have growing or shrinking businesses?
Make sure you review a copy of their monthly printout to get this information.
3. Company Review – Make sure you do your homework on the MLM Company itself. Is it established and proven? Is it financially sound?
Are they currently in a lawsuit or on the verge of bankruptcy? What is their online reputation? Are there a bunch of the company’s products for sale on eBay or Amazon? Will there be long term growth and stability? Or, is the company in trouble?
Talk to industry experts, the corporate leadership team and several successful distributors within the company to get some extra insights.
If you consider all these factors, you should be able to make an educated decision about the “value” of the business, whether you’re buying or selling a downline. Your goal is to come up with a fair and accurate number that pleases both parties involved.
Once again, if you are thinking about buying or selling a distributorship, it would be in your best interest to consult with a CPA and attorney (with a background in MLM or Small Business). This will keep you out of legal trouble and help you make sure everything goes smoothly.
What are your thoughts? Have you ever sold or bought a downline before? If so, what was the experience like? What tips can you suggest for others? Leave a comment below and let me know what you think. I look forward to hearing from you.