It’s interesting that while two Connecticut-based reps, who were among the first interviewed for this article, seemed to minimize the need for contracts, almost without exception, every other rep contacted came down strongly on the other side of the fence.

The two Connecticut reps maintained that the existence of contracts did little to make them feel secure, with one saying, “If the manufacturer wants to terminate us, so be it. We’ll just find another. We know we’re good at what we do and so does our industry. If we part ways, they’re the ones who will suffer, not us.” The second rep added: “We’ve got four principals and have contracts with just two of them. It really doesn’t make any difference. They’re going to do whatever they’re going to do.”

It didn’t take long to find a wealth of reps who differed with them and were hardly willing to let the principal do “whatever he’s going to do.” In general, those who advocated for the existence of contracts stressed that written documents:

• Hold both parties accountable for performance.

• Spell out mutual expectations.

• Anticipate the time when there will be differences of opinion.

• Protect the principal and the rep for that time when the relationship is terminated.

• Identifies each party as a true professional businessperson.

Contracts have always been important in the manufacturer-rep relationship, but today they’re more important than ever. That’s the view of Patrick Johansen, PK80 Medical Manufacturers’ Rep Group, Portland, Oregon.

“If you encounter a manufacturer that is
reluctant to agree upon and sign a contract, it would make me very nervous.”

Avoid the Reluctant Principal

According to Johansen, “It seems reckless to me to enter a relationship with a manufacturer in the absence of a written contract. If you encounter a manufacturer that is reluctant to agree upon and sign a contract, it would make me very nervous. There’s got to be some reason why they wouldn’t agree. It just doesn’t make any sense.”

He continues that in his view a contract spells out expectations that both sides have agreed upon. For instance:

• What level of customer service is expected from the rep?

• Will the rep receive indemnification for potential product flaws?

• How and when will the rep be paid commissions?

• What happens to the rep agreement in case of the manufacturer being purchased by another company?

Get It Done at the Beginning

Another rep emphasized how important it was to work hard from the get-go to obtain a contract that’s mutually beneficial. “Unfortunately, we’ve learned the hard way that the best contract you will ever get is the one you negotiate with your new principal the first time out.” That’s how Mark McIntyre, owner of Marketing Technologies, Boulder, Colorado, describes his reliance on well-written principal-rep contracts. He adds: “We not only insist on a contract, we almost always insist on our modified version of the MANA contract.” 

According to McIntyre, it took experience gleaned from a series of agreements with principals where the rep firm was not overly focused on contracts to teach him valuable lessons. “I’d say that at the outset we were a little too accepting of the terms that the principals offered. We weren’t thinking about the fact that ultimately every relationship comes to an end. When that happened, we found we weren’t as protected as we should have been. We brought them tons of orders and generated a great deal of income, and when they were done with us, that was it. It wound up costing us quite a bit of money.”

When those terminations came, McIntyre explains, he reviewed his contracts and it dawned on him that it was next to impossible to go back — after the fact — to correct any number of shortcomings. “Once the relationship begins, you really can’t say to the manufacturer that you want to change some of the terms. You hardly have a card to play.

“The only time you can truly get what you want is when you initially sign on with the principal and they really want you on board.”

Included in the contractual terms that a rep ought to be concerned with, according to McIntyre, is pay for pioneering work. And even then, a rep’s efforts may not be successful. “We try, but are not always successful,” he says. “From what I understand, there are some other rep firms that are a bit more aggressive in this area than we are. What we generally attempt to focus on are termination terms. In some respects, we’d almost rather have words that guarantee us payment for as long as two years after termination rather than payment for developing business for a manufacturer.

“One more thing that we have added to our contract is a clause that specifies that the contract is binding upon anyone purchasing the principal (or rep), even if on an asset-sale basis. We have had principals sell the business assets but not the business itself, thereby voiding all the rep contracts and any other contracts the selling party had in place.”

“Unfortunately, we’ve learned the hard way that the best contract you will ever get is the one you negotiate with your new principal the first time out.”

MANA’s Contract

What’s been of significant assistance to McIntyre and his agency has been the previously mentioned MANA contract (which may be found on the MANA website — www.manaonline.org).

“We’ve been especially aggressive in putting forth our modified MANA contract. We first learned about the MANA contract when we attended a MANA seminar. That was really one of those ‘Oh wow’ moments for us. My office manager and I were both in attendance, and she’s become an absolute bulldog when it comes to contracts with principals. We send them our contract and pretty much say if you want to get serious with us then this — or something very similar to this — is required. If this represents a deal breaker for the manufacturer, we tell them, ‘Let’s not spend a lot of time dancing around each other.’”

McIntyre’s last comment leads directly to the subject of not being afraid to walk away from business with a prospective principal. He explains, “I’ve been in business with my partner for 24 years. We have a very successful agency and great principals. As a result, we’re in an enviable position. When it comes to the terms of a contract, our position is if a principal doesn’t care to agree, we understand and we’ll just walk. It’s that simple.”

Change in Business Practices

Why and how times have changed were the first things Daniel Dillon, Dillon Technical Sales, Inc., Orange, California, spoke about when the subject of rep contracts was introduced. “Not all that long ago,” he says, “before the Internet and the anonymity that electronic transactions provide, people used to get together in person either socially or for business. You spoke to people face to face and learned what their needs were. If someone raised pigs, for instance, and they needed feed for the pigs, a deal was struck and sealed with a handshake. People trusted each other and their word was good. If you didn’t keep your word, then your reputation was damaged, your business suffered and you couldn’t support your family.”

How times have changed. “Business now is global and you don’t always know whom you’re conducting business with. In addition, there doesn’t appear to be the stigma there once was when it comes to not keeping your word.”

Dillon continues that these are just some of the reasons why written contracts have become much more important than they once were. “I think what we should have now is an environment where you look someone in the eye, agree on something and then commit to writing what you’ve agreed upon. After you’ve had a meeting of the minds, there’s nothing wrong with putting it down so you have a record of what the bargain is.”

Dillon offered more details on his thinking concerning contracts in comments that he offered to the MANA LinkedIn discussion site. Some of the points he made included:

• “I negotiated some clauses (listed below) into my contracts with a principal and subsequently had other manufacturers agree to the same. What I did provides the representative with a rolling guarantee of three years’ confidence that sales, marketing, and applications-engineering efforts put into the territory will result in a few years of commissionable time. These clauses were used in cases where the product line involved some significant pioneering and insignificant existing business and marketing. It was deemed fair and equitable by all parties involved and their attorneys.

• “Ultimately, however, even though there is a contract, it is mutual trust between the rep and the manufacturer that is most important. With trust, honesty, and fair effort to make it work by both parties, everything runs smoothly and effectively.

• “I think that we should take a close look at the contract samples offered by MANA and the Electronics Representatives Association (ERA). These issues have been hammered out to be relatively mutually fair. But, one boilerplate contract doesn’t fit all. I think that I have only one contract that hasn’t had significant departures from what would otherwise be boilerplate. I think also that many manufacturers feel that once they have hired reps for all of their territories they have completed their sales and marketing effort. If that is the case, then what sales and marketing effort is the manufacturers’ representative representing?”

“After you’ve had a meeting of the minds, there’s nothing wrong with putting it down so you have a record of what the bargain is.”

As examples of the clauses he includes in his contracts, Dillon offered two:

“1. Duration of Agreement and Termination: This Agreement shall be effective on the first day of the month of May 20xx, and shall continue in force until terminated by either party by giving not less than 60 days written notice to the other by registered or by certified mail. In the event of termination for any reason by any party, Manufacturer will continue to pay Representative Commissions on all sales into the Territory until the date in which this agreement would expire in accordance to the terms of this agreement (three years from the last contract assessment or “Effective Termination Date). The term of the agreement will be three years commencing from the start date of May 1, 20xx and ending May 30, 20xx+3. All sales initiated during this three-year term will be commissionable and commissions paid to Representative based on correspondence, order dates, and invoices.

“2. A yearly assessment will be done on the anniversary date of the contract or May 1st. The assessment will be used to solve any existing problems in the sales/manufacturing process and quantify the effectiveness of the partnership. Given that it has been successful, another year will be added to the contract, which will maintain the original tenure of three years. The renewal will be a written notice sent to the rep signed by the executive director of MANUFACTURER.”

Contracts = Better Principals

Randy Hubbard sounds a little bit like Daniel Dillon when he reflects on the changes in society and business that have diminished the reliance on the handshake when it comes to manufacturer-rep agreements. According to Hubbard, EMF Technical Solutions, McKinney, Texas, “When I was growing up a person’s word really meant something. Not so much any more. As a matter of fact, with some companies it means little or nothing.

“My experience has been that principals who work with written contracts work better with their reps. They provide better support, training and communication. And, they expect more from their reps. Good companies want a written contract because it protects them and their reps. It’s just a logical approach to business in these litigious times that we operate in. ”

Hubbard doesn’t stop there. “You can’t not have a written contract, and when it comes to contracts, make sure you have an attorney. Words are so important today, and that’s why you’ve got to have an attorney who is conversant in rep law.”

He adds a vote of confidence in the direction of MANA when he says, “MANA is great for reps especially in this area of contracts. We don’t have the ability or time to look for all the services we need to conduct business. That’s where MANA comes in.”

Marlo Poole of the South Carolina-based Carolina Baby Company, cautions other reps against wanting a line so much that they’re willing to work with a manufacturer in the absence of a contract. “It’s not unheard of that a rep will want a line so much that they won’t make an issue of having a written contract. That approach to business degrades the value that we as reps provide. In addition, the rep runs the risk of doing the work for the manufacturer and then not getting paid for what he’s done. If I have any advice for other reps, it’s to hold their ground and insist on a written contract.”

“Good companies want a written contract because it protects them and their reps.”

 

 

 

 

 

 

 

MANA LinkedIn Discussion

In addition to the previous comments, when a question on the importance of contracts was posted on the MANA LinkedIn discussion board, there was no shortage of respondents who pushed for written agreements. For instance:

• William Ingram, Business Development Agent for Permastore Tank and Silos, Suffolk England, couldn’t have a stronger opinion when he says: “Contracts are not an option! They are a mandatory document for an independent rep. Having owned and operated a rep firm for 11 years, we had a contract with every factory we represented. Verbal contracts are worthless. Have a written contract or nothing. Don’t waste a minute of your valuable time until a written contract is in place.”

• As a rep and former president/CEO of MANA, Joe Miller notes that “I have been involved in disputes between reps and principals after the relationship ends where there has been no contract or worse, a poorly written one that has not been vetted by an attorney. The cost to litigate these cases is staggering both in terms of time and money. I’d advise spending a few hundred bucks now, use the MANA manual as a guide and get one of the MANA attorneys to review it for you.”

Miller continues: “Sometimes I think MANA has so much information available that members don’t take the time to wade through all of it. These contract issues are discussed in many of our publications and have been addressed for years. I would encourage all members to regularly review the info available in the member area of the website. Or, if time does not allow, use it as your first resource when an issue comes up, and don’t forget, you can always call in and talk to an experienced rep/executive or a MANA attorney member.”

• With more than 25 years as a rep under his belt, Kevin Thomas, president & owner of Marketing Services Group, Nashville, Tennessee, notes: “We always work with a contract; it is just the best thing to do. We use a modified version of the MANA contract. In addition, we ask for an extra 30 days of cancellation notice for each year of service to the manufacturer. While we have been lucky, there are still some ruthless characters out there, and our insistence on using a contract tends to weed them out.”

• Another advocate for rep contracts is Sid Ragona, owner of Ragona Scientific, Rochester, New York. According to the rep, “Contracts are part of doing business and are as essential as the phone and Internet. I have very well-written contracts with all except one of my principals, and I have found the money spent on legal fees to be worth every penny. Now that I have an established business, the thought of signing on a principal without a signed contract is simply unprofessional; I would not advise anyone to do this. My one exception to this is one of my first principals that I still represent. When I was new to the business, they asked that I work on a handshake agreement, and I was naïve enough to do so, not having a lawyer at the time. They did provide me with a renewable letter of authorization to conduct business on their behalf, which is not the same as a contract; however, from the get-go they have been my number-one principal in all respects, including revenue and responsiveness to my questions and to customers. Since this relationship has worked so well for both of us for many years, I have adopted the attitude of living with this one exception the way it is. I just got the mail and there is another check from them. This is one boat that I have no intention of rocking. So the answer to the question from me is ‘Yes, contracts are the rule, with some exceptions that are grandfathered in.’”

And if any additional thoughts on the importance of contracts are needed, consider:

• “We work with a contract, no exceptions. Not only to keep people honest, but to work through the details of the agreement and make sure there are no misunderstandings.” Brian Middleton, president, D&O Engineering Co., Inc., Wichita, Kansas.

• “We find that it is best to work on a contract basis only. If you ever have a disagreement, then you have something to fall back on. It also helps to make sure that everyone is on the same page at the start of the relationship as well.” — Jeff Bowdoin, president, Bowdoin Marketing, Inc., Elkhart, Indiana.

• “It may be a false sense of security, but I only work with contracts. At a minimum, it projects to the principal that you are professional and it lays out issues that should be agreed upon from day one.” — Bill Ritter, general manager, Turn II Products, LLC, Mason, Ohio.

One final bit of advice for reps intent on venturing forth with their principals on the basis of a time-honored handshake, keep in mind words that have regularly been offered by MANA and the attorneys that work with the association: “A handshake agreement isn’t worth the paper it’s written on.”