Based on our significant experience reviewing and managing commission claims with manufacturers’ representative (rep) agreements with their suppliers, the author thought it might be helpful to go through a summary of these provisions and provide some helpful perspectives and best practices.

“Rep Theory”

The value of a manufacturers’ rep is fundamentally tied into relationships they have with customers and with suppliers (principals). It has been said that the assets of an agency “go home at night,” which is a reference to the intangible nature of their relationships. The rep functions as a drummer, facilitator, expediter and solicitor. As a general matter, the rep does not take title to product, nor do they accept orders, which is important for managing the rep’s business risk.

A New Principal

Some due diligence and analysis are required in taking on the responsibilities of providing outsourced sales services to a new principal. It is important to understand a principal’s philosophy toward reps and to listen carefully to their discussions of prior dealings with reps. It is also important to understand the strength of a principal’s financial position and willingness to commit to a long-standing relationship with good outsourced talent. Additionally, it is important to understand their long-range commitment to share their sales dollars with reps, for sourcing opportunities.

Entities

We frequently see contracts that have been signed without reference to the agency being incorporated or a limited liability company (LLC) or with reference to an “owner.” To minimize personal risks, it is important to always sign contracts as an officer of your corporation or LLC, not as an individual.

Relationship

The rep is an independent contractor, and many contracts take great efforts to indicate such relationships. Generally, this relationship is a non-event to the extent the reps involved are already incorporated and already have multiple-line relationships. For the rep, it is important for the principal to commit by contract to supply copies of invoices and correspondence, i.e., full transparency and accountings to the rep, potentially in exchange for reps providing reports on sales and pipeline activities.

Many contracts move into a description of the nature of the relationship, and exclusivity is an important term. It tells the rep that the principal is fully committed to them, and it tells the principal that the rep is also equally committed within the designated territory.

Territory and Products

Historically, territory has been defined by geographic characteristics. In recent years, territory has shifted from a geographic definition, and it has become popular to define territory by a specified list of prospects and existing customers with a process for adding or deleting contacts from that list.

On the opportunity side, it is important for the rep to be kept up to speed on product developments and also understand where competitors might be getting out further ahead with new product developments.

Calculation and Payment of Commissions

It is helpful to tie the payment of commissions into some sort of key performance indicator. Recent best practices include the receipt of funds by the supplier, or the invoicing or shipment by the supplier. Clarity regarding timing for payment is important, such as 15 days after the end of the month in which invoicing, shipment or payment to the supplier has occurred.

Term of Agreement

Many contracts are renewable automatically or continuous until terminated. Frequently, contracts will automatically renew annually until terminated 30-60 days before the anniversary date.

Termination

Termination provisions are the most important provision of any rep contract. Here, in theory, the timing for notice of termination and post-termination commission payments should be tied into the sales cycle. As an example, if it takes six months to generate an order because of the engineering, technical specifications, and necessary approvals associated with the product, the rep should negotiate at least six months of commission payments.

Also, if confidentiality, non-compete and employee non-solicitation provisions are at issue, a best practice is to match these with the length of time for the post-termination commission payments.

We are seeing more and more situations where termination provisions are shorter than related supply chain delays. Expanding notice and post-termination commission time periods help to address these situations.

Dispute Resolution Provisions

Many agreements contain mediation and arbitration provisions. These provisions can sometimes facilitate a resolution with less expenses on court proceedings. Most litigators are reluctant to have these provisions because it comes at the cost of losing the leverage of a filed lawsuit. On balance, these provisions tend to generate a middle ground and open up communications regarding the resolution of commission disputes. The vast majority of the issues and disagreements under rep agreements relate to the failure to pay commissions due. Many state laws do provide for double damages plus attorneys’ fees to prompt payment before payment becomes late.

Strategy and Planning Considerations

It is always beneficial to have a second pair of eyes and a good attorney experienced in rep matters to review these contracts. Comparing your contracts with each other can also prove helpful in terms of generating consistency, and rep contracts should be reviewed annually.

It is a best practice for principals to be continually innovating and developing new products. Conversely, it is a best practice for reps to be considering replacement principals if their current principals are falling behind.

Products Liability

Products liability claims directly against manufacturers’ reps are rare and the manufacturer bears most, if not all, the risk. A best practice here is to have the rep be added as an additional insured party on the manufacturer’s insurance policy.

Mutuality

Mutuality is also important, and frequently if a supplier is looking for indemnification provisions for the failures of the rep, it is reasonable for the rep to ask for the same type of protections from the manufacturer.

Conclusion

Hopefully the guidelines in this article provide a helpful framework for contract management. Having notice and termination provisions that are a fit for both rep and supplier remain as the most important consideration.

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