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Imagine you are buying a house. Let’s say it costs $400,000, so you put down 20 percent and get a mortgage for the rest. You renovate the kitchen. House prices go up. Three years after you bought the house, it is easily worth more than $500,000.

Would you buy the house and renovate the kitchen if the seller could take back the house on 30 days’ notice? Of course not. For most readers, this question will seem rhetorical.

Now imagine you take on a new line. You train your sales force on the products and spend time introducing them to your existing and prospective customers. After three years, you have doubled sales in the territory. Your time and investment have paid off, and the territory is worth more than it was when you took it on. Would you do all that if the manufacturer could take it all away on 30 days’ notice?

For many readers, the answer to this question is “Yes.” Many sales representatives sign contracts that permit no-cause termination on 30 days’ notice.

There may be nothing wrong with signing that 30-day sales rep contract, or even with buying the house that can be retrieved by the seller. Maybe it’s worth it to you to get to live in that house and cook in that beautiful new kitchen for as long as it is yours, so you are willing to risk the seller taking it all away.

Similarly, maybe there are good business reasons to sign a 30-day contract:

• Maybe the stream of commission revenue you generate from the line is valuable enough to risk having the line taken away even after you work hard and significantly grow sales in the territory.
• You may feel that even if the line is taken away, you will know that you had a good run, and feel that you knowingly assumed the risk.
• Or, maybe this particular line will enhance your ability to sell other products that you carry.

There is nothing wrong with signing the 30-day contract so long as you do so thoughtfully, understanding what the contract really says and knowingly weighing the rewards and risks.

Now let’s imagine a slightly different scenario. Would your decision about whether to buy that house change if, after the seller took the house back, you were not allowed to buy another house in the same town for a year? Would you sign that 30-day sales representative agreement if it contained a one-year non-compete that prohibited you from selling competitive products in your territory for a year after the relationship ended? This is certainly not a rhetorical question. Sales representatives routinely sign contracts that can be terminated without cause on 30 days’ notice and contain post-termination non-competes.

The Importance of Understanding and Negotiating Your Contract

A central tenet of my philosophy as a lawyer and business advisor for sales representative agencies is that sales reps should read, understand, and make a reasoned business decision about whether and why to sign every single contract. At a minimum, this requires:

• Understanding the duration of the contract.
• Understanding when and under what circumstances the contract may be terminated. A contract with an initial term of four years that allows for no-cause termination on 30 days’ notice is a 30-day contract — not a four-year contract.
• Understanding when territory, product offerings, and commissions may be changed. This includes understanding when the manufacturer can convert accounts to house accounts, which is really just a reduction
• in territory.
• Understanding if there are restrictions on selling competitive products, both while the agreement is in effect and after it ends.

Unless you understand what the contract says about these essential business terms, and how various contract provisions work together to impact those terms, you cannot balance the benefits and risks of the deal or make an informed decision about whether to take on the line.

Another tenet of my philosophy is that a sales representative should work to negotiate and improve every agreement presented by a manufacturer, with the goal of agreeing to terms that are more favorable and fairer to the sales representative.

My most successful clients review and negotiate every agreement that they sign with a manufacturer. This is not to say that every manufacturer will negotiate or revise a contract. There are plenty of principals who will tell a sales rep to take it or leave it. But my experience shows that there are far more who will make meaningful changes to the agreement, particularly if the sales representative has leverage, and the manufacturer believes the sales rep can add real value by increasing sales in the territory. The negotiation, in addition to likely resulting in an improved contract, is itself a valuable process. You may gain valuable information about the manufacturer when you ask for the contract to be changed. At the very least, you will learn something about how the principal talks about and treats its sales representatives. This contributes to your ability to make that thoughtful, reasoned business decision. Do you want to sign a contract that allows for termination on 30 days’ notice, or contains a one-year non-compete, or both? What does that look like for your business? What does it mean if the manufacturer can just convert your biggest accounts to house accounts? If the manufacturer tells you that it would never do that, why won’t it agree to change a contract that allows it? Are you willing to pioneer a line if you can be terminated without cause, or not get paid if you have worked on a sale for six months but get terminated before the purchase order issues? Maybe you are; but make that decision with your eyes wide open.

By understanding and negotiating your contract, you will probably get better terms, and you will certainly learn about your potential manufacturer while demonstrating that you are a businessperson who thinks carefully and strategically about how to invest your time and resources. Your house may be your most valuable personal asset. Similarly, your contracts are the most important asset of any sales representative business. By treating your contracts as the valuable assets that they are, you will increase the overall value of your agency.

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