As a MLM company or even a franchisor, if you are going to bring someone into your organization in an entrepreneurial capacity, whether as a distributor or a franchisee, one way to make sure that an individual is serious is to have them make an investment. It's a screening tool. Making an investment gives the individual skin in the game and makes them more apt to take the opportunity seriously.
Additionally, if you bring on someone in that entrepreneurial function, especially if they are going to be selling your products and representing the brand, you want them to be familiar with the products. It makes sense that the new distributor would have to try out different products if they are going to be effective in selling them.
Now, to be clear, MLM does have high turnover (aka a big failure rate). So does entrepreneurship overall. That being said, I would venture to say that for an inexperienced entrepreneur, the ROI and risk/reward proposition is more favorable pursuing MLM than in many (although not all) franchise opportunities available. It is also a much lower overall dollar investment to start a MLM distributorship than most business opportunities, particularly those associated with selling a product (as opposed to a service), although it doesn't have as much control and upside.
(Read More: Icahn, Ackman in Epic Showdown of Billionaires)
If you make the argument that making money from selling entrepreneurship is wrong, then what about the territory developers for franchisors? They primarily make money from selling territory franchise rights, which typically have a much larger investment than a MLM distributorship. If the SEC is going to ding MLM companies for selling entrepreneurship, then I would argue that certain franchise businesses may be next.
From my vantage point, Herbalife and similar MLM models sell products to end consumers, but they also sell entrepreneurship.
They have done so for decades. But, because of either a misunderstanding of or distaste for the model from folks like Mr. Ackman, the stocks have been beaten up. Herbalife and several of its peers have had fantastic returns on invested capital over the past couple of years. It has a strong balance sheet and trades at a substantial discount to its growth rate. It also has significant exposure to international markets. From a fundamentals standpoint, Herbalife has all of the characteristics that I look for in a growth and value stock opportunity. Not to mention that as a strong cash cow with little debt that is undervalued, it is a quintessential buyout candidate.
It looks like Carl Icahn understands this and agrees. And with Moelis & Co. hired as Herbalife's advisor, a buyout scenario is possible, if the stock doesn't continue to move upwards.
(Read More: Icahn Buys 14 Million Shares of Herbalife for 12.98% Stake)
Do people take entrepreneurship too lightly? Absolutely. Do I wish that people were more thoughtful about the risks and rewards of a new business endeavor and how difficult it is to be successful? Yes, I do. However, if someone inexperienced is going to test out entrepreneurship, I would rather them do so on a smaller scale, such as is afforded as part of a MLM operation, than investing their life savings into a larger opportunity.
The greater majority of entrepreneurs fail and many that do succeed do so with little returns, but those realities will not stop individuals from starting and pursuing new business opportunities. The shorts may not like these realities of entrepreneurship, but that alone doesn't make the underlying business a scheme.
Disclosure: Carol Roth owns a long position in Herbalife