With the improving economy and manufacturing activity on the rise, many reps and principals are entering agreements for new lines.

Although much effort is invested in developing relationships and securing new business opportunities, in the initial excitement and optimism, far too often important details of the representation are overlooked, which can cause major trouble down the road.

This article addresses three recurring contract situations and identifies some best practices for reps and principals facing those issues.

Best Practice # 1 — Set the Right Term (Length) for the Agreement

A key consideration is the term — or length — of the agreement.

Many principal-rep agreements contain “evergreen” clauses that state the agreement will continue in effect unless terminated by one of the parties. Here is an example of such a provision:

“This Agreement shall be effective on the __ day of ______, 2017, and shall continue in force for a one year period, and shall be automatically renewed for additional one (1) year periods thereafter unless terminated by written notice from either party to the other not less than ninety (90) days prior to the end of the initial or any subsequent one-year term.”

This can be a good choice when the parties expect a long-term relationship. In general, the evergreen contract also reduces pressure on the parties related to annual re-negotiation of the contract.

A major consideration for parties thinking about a “trial” agreement is making sure the term is long enough to evaluate results. It takes time to develop business and the parties do not want to pull the plug too early. An agreement that does not require an appropriate level of commitment from both parties may not be worthwhile.

The agreement should also address post-termination commissions — in particular, how they are calculated and the length of time they will be paid.

Best Practice # 2 — Know When to Use Sub-Rep/Sub-Agency and Employee Agreements

A sub-rep is an agent or agency which contracts with a rep who in turn has a direct relationship with a principal to solicit orders for the principal’s goods.

Advantages of a sub-rep relationship include:

• Ability to expand territory to provide greater geographical coverage.
• Leveraging established relationships.
• Maximizing sales and marketing efficiency.

Although certain efficiencies can be developed, sharing commission between the rep and sub-rep may result in less than desirable commissions to both parties.

The contract may provide for engagement of sub-reps. [An example of such a provision would be this: “Representative may engage others to solicit orders for the Manufacturer’s products.”] If the rep-principal contract does not allow for sub-reps, the principal’s written approval should be obtained.

The contract between the rep/agency and the sub-rep/sub-agency usually should include provisions that address:

• The sub-rep/sub-agency is an independent contractor, not an employee.
• Allocation of commissions to the sub-rep.
• Confidentiality and non-disclosure; return of confidential information upon termination.
• Non-competition by the sub-rep/sub-agent.
• Non-solicitation of the rep/agency’s employees by the sub-rep/sub-agency and, if applicable, by the principal.
• Remedies in the event of breach.
• Governing law — sub-reps may be located in states whose law is very different from the law of your state.

Employment agreements are advisable any time an agency hires reps. Agreements should address confidentiality, non-competition, non-solicitation of the agency’s other employees, and remedies in the event of breach.

The allowable geographical breadth, duration, and activity limitation of non-competition agreements varies widely under the law of different states, so it is important to have an attorney prepare or at least review all such employment agreements.

A risk to manage here is the principal hiring a rep firm employee and terminating the rep. Best practice is to address this issue in the rep-principal contract, supported by non-compete provisions in an employment agreement.

Best Practice # 3 — Market Development Fees — Shared Investment

Many manufacturers who have no business in a territory want reps to “pioneer” their product lines — these are often referred to as “missionary” lines. It is often challenging for manufacturers to find and retain qualified reps for missionary lines.

This is due in large part to the considerable investment of a rep’s time and resources needed to establish a new line as well as the risk the pioneering effort will fail. Reps traditionally pay for all marketing costs and receive no commissions until product is actually ordered, shipped and, in many instances, paid for.

There are also horror stories of reps successfully pioneering new lines only to have their contracts terminated as the manufacturer goes direct before they can be made whole for amounts spent on customer development. Many reps have indicated a willingness to take on missionary lines if the principal would share some of the costs related to market development. This is different from the standard arrangement where the rep is responsible for most, if not all, costs associated with generating product orders.

Shared investment in developing missionary lines is beneficial to both reps and principals: the principal investing in market development frees the rep to focus more time on the missionary line. The manufacturer benefits from the expertise of the rep firm, which can hit the ground running in the territory for less than the cost of in-house sales staff.

Best practice: monthly flat dollar market development fee for at least six months, with possible out of pocket expense reimbursement. A down stroke investment from the principal in market research and a marketing plan will likely pay dividends.

Conclusion

Evergreen terms, with appropriate notice periods and post-termination provisions, sub-rep agreements that consider all aspects of the relationship, and market development provisions are three best practice techniques to support the operation of your agency.

MANA welcomes your comments on this article. Write to us at [email protected].