The following article is reprinted with permission from PTRA (Power-Motion Technology Representatives Association), www.ptra.org.

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This year, we received a phone call, like many we have gotten over the years, from an owner of a profitable independent manufacturers’ representative organization. He was serious and concerned. He explained that his company has several salespeople, a small support staff, and one manufacturer that accounts for almost 70 percent of its annual commissions. That manufacturer had recently been acquired by a larger company in the same industry and the majority of the acquiring company’s territories were covered by a direct sales force.

In my experience, a key to owning a successful sales organization is optimism — but my client did not seem all that optimistic. He told me that he was calling for himself and several other rep organizations in his same position who anticipated being terminated and losing much of their commission revenue.

Our law firm has dealt with many similar situations. They require strategic planning as much as they need legal advice. Here we had several manufacturers’ rep organizations that together represented about 60 percent of the manufacturer’s U.S. sales. While we have also represented individual companies in situations like this, having a group can create greater negotiating power.

While I cannot discuss a particular case of ours, I will discuss the general approach that we take to deal with situations of this type.

Determining Legal Rights

We start by gathering all of the facts regarding our clients and their relationship with the manufacturer. This means getting the sales agency agreement and amendments to it, sales and marketing figures, as well as data on market share, performance against quota and communications regarding performance. This allows us to determine what legal rights the client might have and whether there is a legal basis for termination. We then must determine the relationship between our client and its sales force. For example, are there contracts restricting the salespeople from leaving and going with a competitor or being hired directly by the manufacturer?

We then analyze, with the help of our clients, the industry, the existence and availability of competing lines, and the strength of the relationship between our clients and their customers.

Once we have all the facts and a good sense of the industry and our clients’ situation, we must try to determine what solution works for the client. There are many possibilities. They include the following:

• Working out some sort of arrangement to stay with the acquiring company as an independent agent or as part of its organization.
• Negotiating some sort of buyout of the relationship.
• Finding a competing line to represent.
• Finding non-competing lines to represent.
• Merging with another sales organization.
• Downsizing.

Often a client’s initial inclination is to file a lawsuit; but even if there is a legitimate cause of action, this is almost always the last resort. Litigation is expensive, time-consuming, distracting and the results are uncertain. Since litigation is also expensive and uncertain for the other side, a resolution of disputes that makes business sense is almost always preferable to a lawsuit.

Avoiding Termination

In addition to trying to avoid termination or helping to find a viable alternative to the manufacturer it is losing, there are many financial considerations in this type of situation. Is our client owed commissions on past sales or on future sales based on either contract rights or some other legal right such as the procuring cause doctrine? That complex legal doctrine, which is governed by state law, may allow one who procures future sales to be paid commissions beyond the time that it is representing the manufacturer. If the client has samples or demonstration units, how are these to be handled in the event of termination? Is our client entitled to a change of control fee, bonuses or compensation for early termination?

In one situation where we represented almost all of the acquired companies’ sales representatives, the sales representatives were able to negotiate buyouts with the acquiring company. That company then hired many of the independent rep agency owners to senior positions. This resulted in a smooth transition of business to the acquiring company.

One of the most difficult situations is when the rep agency has signed a contract providing for a post-termination one- or two-year non-competition restriction. Not only has the agency lost its line, it cannot take on a competing line. Any company that the rep contacts to try to establish a relationship will be unlikely to take it on in violation of a non-compete restriction for fear of being sued. Despite popular opinion to the contrary, non-competition restrictions are legal and enforceable in almost every state. Some states, including California and Louisiana, do have laws that largely prohibit non-competes.

Any successful rep organization should always be anticipating the possibility of losing a major line. I do not know of any successful, well-established rep organization that has not had this happen. The vast majority of our clients continue on in business after the loss of a major line. In almost every case where our client was a successful, well-organized company and the owner was not ready to retire or transition the business, the company not only survived, but within a year or two was in a stronger financial position than it had been before.

Perhaps the shock of losing a major line energizes a company. It is easy to become complacent. The sudden loss of 70-80 percent of revenue is a potent jolt out of complacency.

Sooner or later you may lose a manufacturer either because it was acquired, because it decides to go direct, or because a new sales manager wants to shake things up, perhaps by hiring someone he’s known for much longer. Prepare for this by not allowing your organization to become complacent. Handle your business as if you know that you are going to lose your major line next month. Always be on the lookout for new opportunities.

Losing Sales

We also have some thoughts to share with manufacturers that acquire a company that sells primarily through rep organizations. Our experience is that if a company simply terminates all of the existing reps and transfers the acquired products to its existing sales organization, it will lose a large percentage of the acquired company’s sales. That decline tends to last one to two years. In one of our cases, the acquired company’s operations were closed down after one year. Sales had declined to almost nothing. If the acquiring company wants to retain existing sales and grow the sales of the products of the acquired company, it should approach sales force transition generously and with a plan. First, be honest with the sales force. Tell the sales force what to expect and what your real plans are. Create a workable transition plan, deal with all commissions due properly and promptly, and make arrangements to buy back demos and samples even if that is not required.

A manufacturer acquiring a company that sells through reps should understand that just as the president and national sales manager of the acquiring company worry about the future and must support their families, the same is true for the salespeople and owners of rep agencies. Even if you intend to go direct, you might come up with a transition plan that works. For example, you might enter into an agreement with the owner of the rep agency to allow you to hire his top sales and support people. The package could include the owner’s support in transitioning customers in exchange for ongoing commissions for six months or a year on sales in the rep’s former territory.

Naturally, manufacturers should work to live up to their contractual requirements. We have had many situations where a manufacturer’s decision to withhold commissions ended up costing the manufacturer much more than it could have anticipated. In the most extreme situation, a rep agency, having been terminated by a manufacturer, consulted us because the manufacturer had failed to pay commission. He thought that he was owed slightly more than $100,000. After the manufacturer was forced by a court to disclose all of its sales information, it became apparent that the sales rep was not owed $100,000.00, but rather $1.5-million dollars. The manufacturer had been withholding commissions for years in our client’s exclusive territory. In other situations, a state’s sales representative statute has led to a manufacturer paying two or three dollars for every one dollar of commissions that it withheld.

My final advice both to manufacturers’ representatives and manufacturers is when the time comes to end the relationship, be realistic, be generous, and do not let personal feelings or personality cloud your business judgment. It is far better to be compensated or to compensate someone for a smooth transition than engage in an aggravating, time-consuming and expensive alternative in a court.