In the first installment of this article, I suggested a sales representative would do well to think of himself as the provider of unsecured credit to a principal. With that in mind, a representative should consider basic loan underwriting concepts when structuring an agreement with a new principal. The idea is to minimize the damage when the principal becomes unable to meet financial obligations to the representative.

© Daniela Spyropoulou | Dreamstime.com

At the contract negotiation stage, the need for the representative to think of himself as a banker providing credit on an unsecured basis applies most directly in the payment and remedies provisions of the sales representative agreement. Over more than 20 years during which I have represented and counseled sales representatives, I have observed a reluctance by sales representatives to take what I consider to be an appropriately realistic stance in protecting their payment and collection rights. Their general feeling is that there is no reason to upset the apple cart or inject discord into a negotiation that otherwise appears to being close to final. After all, the parties have already agreed to the commission rate and the accounts or territory to which the representative will have exclusive rights. Why give the principal cause to believe that the representative is anything other than fully trusting of and confident in the principal? The better question to ask is what can I, as a business operator, do to protect my right to receive the economic benefits I am entitled to?

It is interesting to compare the analogous situation in the world of lending. Banks sell money to their loan customers. Loan officers are salespeople. The product being sold is credit. The solicitation of loan customers is quite analogous to the representative’s solicitation of prospective principal. When the courtship is over and the loan documents are prepared, the lender doesn’t hesitate to include appropriately strict terms with respect to payment and appropriately aggressive remedies if there is a failure to pay in accordance with the terms of the agreement.

The simplest and least controversial aspect should be the inclusion of straightforward text which imposes an interest factor on delinquent commissions and provides for recovery of attorney’s fees if the representative has to engage attorneys to assist in collection. There is little, if any, material difference between a delinquent loan payment and a delinquent commission payment. In each case, there are usually no disputes concerning the amount due or the entitlement to the commission or loan payment. In each case, the failure to make the payment imposes real costs or burdens upon the lender or representative for which they should be compensated. I have not yet heard a persuasive argument for omitting the recovery of interest and collection costs from a sales representative agreement.

Maximizing Collection

After there has been material payment default, the representative has to determine what course to follow to maximize the possibility of collection and minimize the risk that the amount of the delinquency will grow over time. Appropriate steps include:

• Determining the cause of the delinquency;
• Assessing whether the principal’s problems are temporary and reversible or beyond repair;
• Setting up and documenting an appropriate cure program; and
• Deciding when it is time to sever the relationship and move on.

When a commercial loan customer defaults on a periodic payment, the officer in charge of the relationship promptly initiates contact with the borrower to try to determine what has gone wrong. This is a form of due diligence and need not be antagonistic. Essentially, it is fact finding that can take place in a positive manner. The principal should be willing to share with a representative the issues or circumstance which made it impossible to make a scheduled commission payment. Indeed, you would expect a principal to give a heads up to a representative at least 10 days in advance of a payment that is going to be missed. That may the best indicator of how the relationship is going to go long-term. A principal that lets a representative know in advance that the payment will be delinquent is much more likely to be working in good faith with the representative in an effort to continue the relationship and cure the defaults. A principal that is non-communicative or appears defensive when having to explain why a commission payment is missed is, from my perspective, “high risk.”

After assessing the reason for delinquent payment, the representative has to make a difficult decision; continue the relationship and work on a cure or repayment program or terminate the relationship. In the world of lending, this is analogous to the decision on whether to enter into a forbearance agreement or to proceed with collection remedies.

Forbearance Agreements

A forbearance agreement is a contract between a borrower and lender entered into after the borrower defaults under its loan obligations. In a forbearance agreement, the borrower acknowledges the existence of the default and enters into future performance covenants that have been agreed to by the borrower and lender. In return for this acknowledgement of default and covenant to make future payments, the lender agrees not to enforce the existing defaults for a stipulated period of time.

If the amount of the commission payment delinquency is large enough, a document analogous to a forbearance agreement should be prepared as soon as possible. Most borrowers who are in default view the execution of a forbearance agreement as a positive and acceptable first step to resolving the problem. It is certainly better than being vulnerable to a collection suit brought by the lender. A principal committed to fixing problems should view entering into an agreement with the representative as a positive step to address the existing default in return for the representative’s commitment not to initiate collection or enforcement action. If a principal is reluctant to do this, the message to the representative should be clear. This principal is not committed to finding a way out of the problem.

When a representative concludes that it is unlikely the principal will recover to the point of being able to pay delinquent and future commissions, it is time to terminate the agreement in accordance with its terms and initiate collection and enforcement remedies. Failure to pay sales commissions is indicative of a larger problem for the principal. As a practical matter, this means the sales representative is not the only obligation which is not being paid. Therefore, a representative should act promptly, using an attorney who is knowledgeable and experienced in the commission protection statutes of the various states and in the dynamics of commercial collection litigation. When creditors are pursuing a company in financial trouble, the first creditor to obtain a judgment is sometimes the only creditor that receives payment.

In summary, a sales representative should approach the prompt collection of their commissions in the same way banks approach collecting loan payments. A sales representative should not be reluctant to take reasonable steps which let a principal know prompt payment of commissions is a matter of importance to the representative and that it must be treated as a priority matter by the principal.