Why sustainability should matter to you
Our world is changing. Not only are political factors...
At first glance, it can be hard to differentiate between a franchise and a multilevel marketing business. Both allow third parties to use their branding and sell their products or services in exchange for an initial fee and ongoing royalty payments, but this is where the similarities end.
Let's look at the key differences between a franchise and an MLM.
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Regulation
Joining a franchise is strictly regulated, with both franchisors and franchisees protected by law. Before joining a franchise, a significant amount of due diligence is needed. It is strongly recommended that franchisees seek the support of a franchise attorney to help them understand their responsibilities under the franchise agreement they will need to sign to secure their place with the business. Training is provided to all new franchisees, and franchisors are strongly incentivized to support their new entrepreneurs in making their business successful because their failures reflect poorly on the brand overall.
A strong but rather flat regulatory structure exists, with the franchisor and their senior team leading the operation and engaging with franchisees who all operate on a level playing field and on identical terms.
In contrast, MLMs tend to have a pyramid-shaped governance structure with the business owner at the top, followed by their management team and then individual business owners beneath them, who are also responsible for recruiting further consultants to the brands. To be a legitimate MLM, governance documentation must exist explaining the fair and reasonable rules new recruits must follow.
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Success rate
Franchises in Canada have a success rate of 97% [1], while MLM statistics suggest that only 25% [2] of people who join make a profit. The main reason for this disparity is that franchising offers a proven business model and comprehensive support systems that MLMs cannot match.
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Operating method
Both franchises and MLMs sell branded products or services directly to customers, but there is one fundamental difference between them. Franchisees are only responsible for managing their business, while MLM consultants are expected to recruit further people to the brand while also selling to the public. Most MLMs must abide by the 70% rule, which states that 70% of their income should be generated from sales and 30% achieved by recruiting further consultants.
Because franchisees can focus wholeheartedly on running their business with no pressure to recruit anybody else, they are free from unwelcome distractions and stand a better chance of making their business successful.
Franchising is a proven mechanism with a high success rate, while joining an MLM is a risky strategy.
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Resources:
[1] https://www.franchise101.net/canadian-franchise-statistics
[2] https://canadianbusiness.com/ideas/multi-level-marketing-canada-pandemic/
