You receive an email or direct message from an old acquaintance. You can't believe how friendly they are. It's been so long since you last spoke that you weren't sure whether they'd passed away or retired and moved to Bora Bora.
Fortunately, they seem to be doing well, and according to their correspondence, they're raking in the dough. The gig sounds perfect. They tell you they only work when they want, and the money they earn gives them enough extra cash to travel the world. While your Social Security benefits and retirement investments keep you comfortable, you're a little bored.
Besides, who can't use a little extra income?
Image source: Getty Images.
A happy salesperson
You respond to the acquaintance's note with interest and receive a phone call the same day. You briefly feel hopeful as they describe the fantastic "opportunity" they have for you. The person tells you they're selling cleaning supplies, and it's easier than they ever imagined. These supplies are so good that friends and family practically beg them for more.
You get to hear how happy this person is to own a small business and how great it is that the job lets them stay in touch with old friends as they share the business opportunity. The old acquaintance certainly sounds happy, although they become a little cagey as you delve deeper.
Before the call, you downloaded a list of questions to ask. After all, if you're going to consider becoming a small business owner, it would be irresponsible to be shy with your questions. This is when you begin to spot red flags.
Red flags
You ask about up-front costs, and the person tells you that the "seed money" is a reasonable $3,500. However, they assure you that you'll make that money back in "no time."
You ask what happens if you don't recoup that money. You've never been much of a salesperson, and you're not sure you can do it. "Don't worry," the person says, "There are other, better ways to earn money."
When you inquire how the old acquaintance makes their money, you're told it's through recruiting others. Those recruits are your "downline," and when your downline pays their "seed money" or makes a sale, you get a piece of the action. Better yet, when someone in the downline finds recruits of their own, you also get a piece of any seed money and sales those recruits make.
Finally, when you ask how much money the acquaintance made last year after expenses, they tell you they're not "sure," and will need to "double-check their books." Or, they may put you off, telling you they'll be happy to talk about it later.
If it wasn't clear right away, you were sure by the end of the conversation that you were being sold a pyramid scheme.
8 signs you might be dealing with a pyramid scheme
Once you know what to look for, it's easier to spot a pyramid scheme. Here are some of the clearest signs:
- Recruiting new salespeople is the primary way to earn money.
- Products are often low quality, overpriced, or both. If most of your friends are living primarily on Social Security benefits, you're confident they would not pay so much for a single product.
- You must pay to join, with a portion of your seed money going to the person who recruits you.
- The person recruiting you may suggest taking money from your 401(k) or pension to cover the cost of building your business.
- Your recruiter is hesitant to share verifiable financial data with you.
- If you do manage to get your hands on the compensation plan, the structure is complicated or secretive.
- You receive unrealistic promises of how much money you can make. According to the Federal Trade Commission (FTC), most people find they can't sell enough inventory or recruit enough people to earn money. The FTC says that in the end, most people run out of money and have to quit, losing everything they've invested.
- There's a no-refund policy. If you decide it's not for you after paying your seed money, you can't return the inventory.
Confusing the issue
Multi-level marketing (MLM) and pyramid schemes are two different things, though some businesses that sell themselves as MLMs are, in fact, pyramid schemes.
How can you tell the difference?
While the differences can seem subtle at first, they're essential. Here are the signs that a business is multi-level marketing:
- According to the FTC, if an MLM is a legitimate business, it pays distributors based on sales, not recruitment.
- You sell products to retail customers who are not involved in the MLM.
- You can recruit new salespeople and develop a downline, but the bulk of your income does not depend on recruitment. In fact, you could never sign a recruit and still earn money from sales.
The tricky bit is that pyramid schemes often mask their true nature and brand themselves as MLM companies. It's not until you've lost your money that you realize you've been had.
Before taking on a job with any company, investigate it online. Find out what others have to say about their experiences and ask so many questions that it borders on rudeness. It's your money and time, and you deserve to be protected.
In the meantime, if you're looking for a part-time job, why not find something you'll enjoy that pays you a guaranteed income? There are plenty of legitimate companies that will appreciate your experience, and plenty of retirees who find satisfaction while working in retirement.
