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Companies seeking a way to streamline their sales process and create time to focus on their product lines may find that sales representatives are an efficient and effective way to drive sales, perhaps by tapping into existing networks of prospective buyers or by allowing the company to reallocate its human resources to more pressing internal needs.

Since the sales representative agreement often ties the representative’s compensation to his work production through a commission structure, the incentives for both manufacturer and representative align. A well-drafted contract between the manufacturer and the representative can ensure a fair, mutually beneficial relationship.

When seeking to retain a sales representative, a company has several key decisions to consider. First, the company must determine whether the sales representative will have exclusive rights to a certain product line, sales medium, or geographic territory. Next, it should decide the commission structure the representative will receive. In turn, these types of decisions will affect whether the sales representative is an employee or independent contractor. Finally, each party will want to include other general contract terms in the agreement.

Exclusivity

Exclusivity determines whether a sales representative will be a company’s sole agent. Exclusivity can be geographical (as in the sole rights to sell a product line in the state of Illinois), line-based (like the sole rights to a sell a company’s stone products, but not wood or vinyl), or even manner-based (for example, the sole right to sell products at trade shows). If an agreement is exclusive, the company cannot engage additional representatives to sell whatever the exclusive object is.

Geographic exclusivity, divided by territory, is the most common type of exclusivity. Depending on its size, a manufacturer may choose to base a set of sales representatives in larger metropolitan areas, or in cities that are logical for the industry. For instance, electrical manufacturers may want to make sure they have a strong sales presence in areas like Silicon Valley and the Research Triangle.

Generally, exclusivity is more valuable to a sales representative because she is guaranteed to accrue all of the company’s sales in the exclusive area for the duration of her contract. Accordingly, a company offering exclusivity should consider proposing a slightly lower commission percentage than it would in a non-exclusive agreement.

Commission Structure

Commissions are designed to reward workers for successful completion of the job. For a sales representative, this means granting percentages of completed sales to the representative. A typical commission rate for a manufacturers’ sales representative is in the 10-25 percent range for consumer products and 5-10 percent range for industrial products. Depending on the industry, a sample commission structure can be as follows:

• Twenty-five percent of net commissions for sales made at trade shows.
• Five percent of net sales to wholesale accounts.
• Twenty percent percentage of gross sales margin.

The agreement should state that commissions are only deemed earned when the consultant’s sole efforts initiated and closed the sale, the manufacturer accepts and approves the sale, and the manufacturer receives payment for the sale.

When devising a commission structure, the sales representative agreement should set forth at least some additional basic information:

• The actual commission percentage.
• The amount of time within which the company must pay the commission.
• The situations when the company will owe no commission.
• Whether the company will pay for reimbursement of expenses.
• Whether commission is the only compensation the sales representative will receive.

Employee or Independent Contractor

Classifying sales representatives as employees or independent contractors affects the company’s obligations regarding wages, tax payments and benefits. Whether a sales representative is an employee or independent contractor depends on the degree of control that the company will exercise over how the sales representative accomplishes her job. Generally, the employee/independent contractor dichotomy depends on the following factors, among others:

• Whether the company supplies the worker with equipment, materials, software or tools that she must use while on the job.
• Whether the company sets the precise hours the representative works.
• Whether the company provides benefits such as insurance, pension plans, or vacation pay.

To the extent the company would answer these questions “yes,” the more likely the sales representative is an employee. Employers must provide minimum wage, withhold and pay employment taxes for programs like Social Security and unemployment, and adhere to federal and state employment regulations.

However, if the answer is more often “no,” she is more likely an independent contractor. The representative must then complete her own income tax assessments and negotiate a reasonable rate of pay with the company rather than depend on wage and hour laws as a baseline. The reason many employee requirements don’t exist for independent contractors is to adjust the company’s obligations with respect to a worker who is engaged with multiple employers at once. To prevent overly high transaction costs created by independent contractors who do not remain with the company for sufficiently long periods of time, companies seeking to engage sales representatives should emphasize setting a period of time the representative will work for the company in the contract. A company should also consider hiring only one sales representative at a time so that it does not find itself constantly in need of orienting and training new staff.

Delivery Guarantee

Every manufacturer has had it happen: a big purchase order comes in, but product shortage or labor outage forces the manufacturer to back out from the order. If the sales representative who landed the order is paid on commission, he receives nothing and cannot recoup the time and opportunity costs he put into the deal. Delivery guarantee provisions protect the sales representative’s interest, but manufacturers should consider them as well. A manufacturer confident in its production capabilities will often be able to recruit and retain a more loyal, productive team of sales representatives.

Additional Provisions to Include

Various other contract terms may not be unique to sales representative agreements, but they still merit careful consideration.

• Restrictive covenants: Contract terms that attempt to govern a sales representative’s actions after the end of the relationship with the company must be reasonable in time, place and manner. What does this mean? A company cannot prevent a sales representative from making a living, but it can prohibit a former employee from seeking to steal clients away or disclosing confidential information.
• Intellectual property: The agreement should state that all business contracts, customer lists, lists of sales and prospects, pricing information, sales data and any other confidential information that causes a competitive advantage for the business shall be maintained in the strictest confidence as trade secrets of the company. It should also state that any intellectual property rights created during the sales representative’s work for the company belongs to the company itself, not to the sales representative.
• Termination/Breach: If a contract has a set period of time, the agreement will last until that point unless the sales representative materially breaches the contract. The company should list in the contract different activities it wishes to prevent, and make sure that it has a procedure to get out of the deal if the sales representative just isn’t working out.

In light of these various considerations, companies should not lose sight of the potential effectiveness of a productive sales representative. The ability for a company to focus on production and development, placing the sales burden on professionals who excel in that area, can pay huge dividends as long as the company addresses the business risks involved.