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There has never been a relationship between a supplier and a manufacturers’ representative that survived forever. With proper attention to detail when negotiating your next representative agreement, however, you may diminish the likelihood of a premature end to the relationship or costly litigation upon termination. Here are five rules to focus on when negotiating your next rep agreement.

Balance Pays Dividends

Sales reps and manufacturers sometimes seek to gain advantage over their partner by incorporating a bias into the rep agreement favoring the author and placing the other party at a disadvantage. This technique rarely enjoys the benefits desired. The best agreements maintain a balance of power between the sales rep and the supplier. If the relationship begins with a biased agreement, that bias ultimately works against development of a solid relationship. Since the agreement is the foundation of the partnership, the author must use balanced clauses that elicit trust.

Each clause of the agreement should seek to strike balance between the power of the rep and manufacturer. If there is a clause on indemnification, write that clause such that the supplier holds the rep harmless and the rep holds the supplier harmless in the event that either party must defend itself in litigation. If there is a paragraph outlining the duties and obligations of the representative, there should also be a paragraph outlining the duties and obligations of the manufacturer. A unilateral clause frequently leads to the distrust of one party by the other. Distrust always works against development of the relationship and ultimately against sales and sales growth, the original purposes of the relationship and contract.

Mature suppliers and sales reps don’t treat their partners as junior parties to the rep agreement.

When a partner inserts a biased clause into the agreement, it does so usually because it believes that the other partner is less seasoned.

Remember, junior partners, with time, ultimately become seasoned. They will ultimately discover a biased agreement that works to their disadvantage. Rule: Seek balance in the relative power of both parties in that next representative agreement.

Term and Termination

Suppliers and sales reps have preferred term periods ranging from months to decades. The majority of representative agreements nowadays specify an initial term of one or two years, with semiautomatic renewal that continuously adds one additional year to the life of the agreement. The program is semiautomatic since renewal occurs automatically unless one of the parties sends a notice of intention to not renew within 60 days of the end of the current agreement. The benefits of such a regimen are twofold. First, the agreement reminds both parties once per year that there is a real possibility that the agreement and relationship may end. Such a reminder is an opportunity to consider alternative arrangements. Second, once per year, both parties have an opportunity to discuss their contract face-to-face, and to make minor revisions to its terms and conditions. Both parties have the opportunity to propose and request signature on a new agreement. When amendments are slight, parties are likely to accept the new terms and conditions. A term of one or two years merely sets initial expectations. Beyond the initial term, actual sales performance determines the duration of the relationship.

The termination section of a representative agreement is arguably the most important. The parties must understand how they may terminate the agreement. Equally important, the parties must understand the conditions under which their partners may terminate the agreement. Conditions related to termination are frequently the issue that leads a party to file a claim. Allegations of wrongful termination are a frequent issue when sales partners take their problems to a court.

There are routinely two forms of termination in a representative agreement: Termination for Convenience and Termination for Cause. Agreements may use only convenience, only cause, or both. Seasoned parties to representative agreements usually prefer to use termination for convenience only because they know that the parties won’t needlessly argue about cause when it comes time to unwind the sales partnership. Arguing about cause frequently leads to litigation. Suppliers routinely regret arguing about cause in court because the costs quickly escalate. Litigation acts as a massive drain on management time and a company’s financial resources. Companies can avoid litigation regarding termination by including a termination for convenience clause. Seasoned sales reps and manufacturers understand that sales performance, not words in a contract, ensure a long-term representative relationship.

If an agreement includes a termination for convenience clause, there is no real need for a clause dealing with cause. Some people feel more comfortable when the agreement includes a termination for cause clause. Although it isn’t necessary, its presence does not represent a problem, provided that the contract also includes a provision for terminating the relationship for convenience. Rule: Include a Termination for Convenience clause in that next representative agreement.

Avoid Rapid Geographic Expansion

When aligning with a new sales partner, it is important to assign a territory in which the rep has proven itself previously. If the new territory is much larger than the new rep’s established territory, the chances of an early demise are great. Experience suggests that the better policy is to open a new sales relationship in the sales rep’s proven territory and expand the territory upon success in the smaller territory. Rule: Don’t unfairly burden a rep with a territory much greater than its recent experience and history. Expand into virgin territory cautiously.

Four Eyes vs. Two Eyes

Most representative agreements benefit from review by people experienced with creating and negotiating contracts. Sometimes attorneys review the contracts. Sometimes sales managers with contract experience review the contracts. The best results come when a both legal professional and a seasoned sales manager review the rep agreement simultaneously.

When a legal professional (and not a seasoned sales manager) reviews a contract, the resulting document can be legally acceptable, but commercially ineffective. When a seasoned sales manager (and not an attorney) reviews a contract, the resulting agreement can be commercially effective, but legally unacceptable. Problems can arise when only two eyes review a sales channel agreement. When four eyes review an agreement, one pair from an attorney, and one pair from a seasoned sales manager, the probability of a legal skirmish upon termination diminishes greatly. Four eyes are better than two eyes. Rule: Have a legal professional and a sales professional review that next rep agreement prior to breaking out the gold pens and champagne.

Due Diligence

The unwinding of a sales partnership between a supplier and a sales rep usually begins with the dissatisfaction one party has with the other. Sometimes that dissatisfaction is bilateral. Experience with both suppliers and sales reps suggests that the seed kernel that develops into irritation between the parties begins with poor due diligence. The only way to avoid the disappointment of both parties to a rep agreement is to engage in the time-consuming and painstaking task of due diligence.

Without proper due diligence, each party’s expectations of the other is based on assumptions, perhaps valid but frequently invalid. When real world issues place pressure on those responsible for developing sales channels and line-cards, it’s easy to gloss over facets of due diligence and race to drafting the contract. Speeding through the due diligence process may yield an earlier date on the rep agreement. Unfortunately, speeding through the process usually leads to unhappy endings. Rule: When planning to sign up a new supplier or sales rep, begin with a very clear statement of the steps in the due diligence process. Then, stick with those steps before signing that next rep agreement.

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