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I am currently working behind the scenes with one of my sales rep clients in trying to finalize a sales rep agreement with an automotive parts supplier located in Europe. They have been working on this for many months.

The Problem

The principal was recently awarded close to $20 million in annual business from a major-tiered automotive supplier that was solicited and procured by my client. The original discussion before the business was awarded was that commissions would be paid at the rate of four percent of the net sales. This was included in the original draft of the sales rep agreement my client sent to the principal, which was based on my form agreement. The principal included the four percent in the quote to cover the commissions to be paid to my client. Once the principal found out that the opportunity may result in more than $20 million in sales per year, their tune changed. The principal took the position that the four percent would be paid on the “gross margin” without defining what the gross margin was. Please refer to my article, “Beware of Commission Plans That Calculate Compensation as a Percentage of Profit,” published in the May 2023 issue of Agency Sales magazine.

A commission on four percent of the margin would be a significantly lower effective commission than the four percent on the sales price. As I stated in my prior article, always beware of commission plans that calculate compensation as a percentage of profit or margin. It is much simpler to have commissions calculated on the net sales amount. Simpler is almost always better.

Frankly, I think that the principal was stringing my client along thinking that they were protected because there was no signed agreement yet. That may be true in some jurisdictions but not in Michigan. My client is located in Michigan and the customer is located in Michigan. Under Michigan law, a sales representative is entitled to a commission on any business he or she has procured, irrespective of the fact that the sales representative may have been terminated. The standard in the automotive industry in Michigan is that life-of-part commissions generally apply unless there is a specific agreement limiting commissions in the event of a termination. My guess is that the principal in this instance is unaware of this aspect of Michigan law. The principal likely thinks that without a written contract, they could terminate the sales rep without any liability for post-termination commissions.

My advice to my client was to finalize procuring the business and then worry about finalizing the sales rep agreement later. There are also many factors to take into consideration in finalizing the sales rep agreement. These can include the following:

• The probability of future significant opportunities. Presuming that the principal is now an authorized supplier for the customer, there should be future opportunities if the principal performs well on the current program.
• Does it appear as though the principal has plans to terminate you and go direct?
• Does the overall relationship look like a good business opportunity in the long term and a good complementary line for your sales rep agency? Sometimes the synergistic effect of a new principal can benefit your relationships with your other principals which may justify a lower commission rate.
• Commission dollars are more important than commission rates!
• It is almost always better in the long run to work out the disagreement with your principal than to have to hire an attorney to litigate the dispute.

The Solution

It is always a good idea to have a solid written sales representation agreement before forming a relationship with a new principal. Things do not always work out that way, however. Especially, if the sales representative has an opportunity and is in search of a principal with which to place the business. In Michigan, if you have an opportunity in search of a principal, try working out an acceptable agreement as quickly as you can. If you get the impression there will be difficulty agreeing upon the commission rate, you may want to strongly consider getting the business first and then working out the details of the sales rep agreement later. Most principals want to be fair but keep in mind that the key person you are working with at the principal may not like the idea that you will be making more money than he or she is.

Conclusion/Moral of the Story

The main point of this article is that it is generally better to procure the sale and finalize the sales rep agreement later than to spend so much time working on the sales rep agreement that the business opportunity is lost. I also strongly recommend that you find and form a relationship with an attorney who knows and understands your business. He or she can help you navigate these types of troubled waters. A good place to start is with the MANA list of qualified attorneys.

A good resource for sales representatives is the book I wrote and self-published about 20 years ago, Protecting Your Commissions — A Sales Representative’s Guide. Feel free to contact me by email if you would like a copy of my book or any of the articles mentioned above. I would be happy to send them to you at no charge. My email address is [email protected].

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