Negotiating a meaningful agreement between a rep and a manufacturer is key to establishing a solid relationship. The attitude from both parties needs to be “win-win” to make the relationship last long-term. How this negotiation process goes could also be an indicator of how the relationship will go.
As a rep agency, we try to focus on three key areas, whether it is an agreement for a territory or account-to-account:
- Rates and/or commissions.
- Termination clauses.
- Product liability indemnification.
Most industries have established ranges for commission rates or percentages. However, these can vary within the agreement depending on business being turned over, pioneering expectations, involvement in the selling and maintenance processes, etc. It is critical to establish up-front, agreed-upon commission rates. Discussions should include:
- Current business in the territory.
- Is that business part of the agreement? Will it ever be? And, on what kind of timetable or performance measurement?
- What will the initial turnover rate be? If partial, will it go to full at some point?
- What is the commission rate for new business at either existing accounts or new accounts?
- If there is little to no business in the territory, is there a fee arrangement that can be negotiated as a shared territorial investment?
As with marriage, no one enters into the relationship with plans to end it. In today’s business environment, however, even with best intentions, there are mergers, acquisitions, key personnel turnover, etc. Things can literally change overnight, so it’s important to have a reasonable termination clause in place. Both parties need to agree upfront to terms for the possible dissolution of the relationship.
A time frame should be set for compensation to the rep for product booked or shipped after the dissolution occurs. We have had success negotiating a clause that allows for one month added for every one year of representation (with a 12 month total maximum). So, if we work with a principal for four years, four months would be added to the already agreed upon compensation time frame.
Another key area to bring up in negotiations is product liability. It is good practice to have a clause in the contract stating the rep agency is not liable for the products supplied by the manufacturer. Also, the principal carries product liability insurance, and it can be beneficial and wise for both parties to include the agency under their coverage. This can be done with a “broad form vendor’s endorsement” at little or no cost to the manufacturer. Even though an agency may carry an umbrella policy that covers them for a set amount of product liability, it is advantageous for the manufacturer to indemnify the rep so that in the eventuality of a product liability lawsuit, a unified defense is presented.
During the negotiating phase of a principal/rep relationship, using the word “contract” may set a tone of legalism. Using the term “letter of understanding” or “agreement” can be less foreboding. Sometimes it may be better to just put together a “letter of understanding” for the first few months of the relationship, and then formalize the agreement after a set amount of time — using the MANA contract as a guideline.
Whatever you do, do not rely on verbal agreements and handshakes as your only basis for terms and agreements. Get a written agreement, and make sure it’s a good one!
