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Is Herbalife A Legitimate Business Or A Scheme?

Feb 04 2014


Herbalife (Photo credit: netodarkis)

Since its creation in 1980, Mark Hughes' Herbalife has grown from a business with no financial value to a $4 billion empire. However, with financial success came heavy criticism about the nutritional organization's business practices. Because Herbalife is a product sold exclusively through independent distributors, many started to scrutinize its business model and questions about its legitimacy has invoked the interest of vocal critics like Pershing Square's Bill Ackman.

Herbalife manufactures nutritional products, which are then sold to independent distributors. These distributors are charged with finding their own customers and members to become distributors themselves. The more products a distributor sells, the bigger the discount on goods s/he receives from Herbalife. Members can reach the level of supervisor, after which profit is based largely on how many members they have recruited.

Although critics have likened this business model to a pyramid scheme, Herbalife maintains that it is a legitimate business opportunity for entrepreneurs. Even if distributors have to follow rules and regulations set out by Herbalife in every country it is sold, the company dismisses claims of dubious legal and business practices. In order for a business model to qualify as a pyramid or Ponzi scheme, compensation must be based on the number of people recruited. Therefore, Herbalife does not fall into that category because members are compensated through their sales of the product.

It is this debate over Herbalife's legitimacy that has seen the company experience unstable growth and dipping patterns in the stock exchange. Herbalife stock opened at 4% which later dipped to 1% in the afternoon. However, the company recovered slightly throughout the rest of the day, closing at 7% after Herbalife announced it would buy $1.5 billion of its stock back.

In December, Herbalife requested and completed a re-audit of their 2010, 2011 and 2012 fiscal years by PricewaterhouseCoopers, an independent public accounting firm. Control over financial reporting was also assessed. Despite Ackman's call for an in-depth of the company's recruiting and compensation systems, Herbalife practices have been declared to be fair, legal and legitimate.

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