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The changing landscape of contracts between reps and manufacturers and the growth of shared territorial development fees were linked earlier this year in two MANAchats.

In one chat devoted to the contracts that reps sign with their principals, members of A League of Their Own (ALOTO), MANA’s Special Interest Group for women, discussed and dissected their experiences when it comes to negotiating and living with contracts. A subsequent chat was devoted to the existence and use of retainers or monthly fees paid by manufacturers to reps when pioneering work is called for.

In the first instance, one rep stressed the point that “You commit everything to paper and you can build everything you want into what you think is a fool-proof contract with your principal. The fact remains that relationships supersede all contract terms. You never know when the tide will change with the company you’re dealing with.”

The ALOTO reps that took part in the chat began their discussion with one rep who noted, “I began my career in direct sales, moved on to being a sub-rep, a rep, and now I have my own agency. As a result, I’m curious to have a look at all sides of the contract spectrum and see the variety of contracts that reps sign.” The point was made that before a rep moves forward in their relationship with a manufacturer, they want to know what all the responsibilities and expectations are. “I’m aware of the fact that if I don’t sell something, then I don’t get paid. But there’s more to the relationship than that. Are reps being granted exclusivity in terms of territory; or is it exclusive by customer or project?” The rep continued, “I’m hearing more and more about exclusivity being granted by customer. But then the question remains, if for some reason I lose the line — with that customer — am I losing commissions for the life of the project?”

House Accounts

Then there’s the matter of house accounts. One rep offered, “While we used to have geographic territorial agreements — that was maybe 10 or 15 years ago. Everything that was sold in that territory, we received the commission. However, I’m finding that that has changed today and agreements seem to be based more on an account-by-account basis. The supplier or principal will carve out their direct house accounts and our contract stipulates what accounts they have for themselves. There’s not a great deal of negotiation when it comes to house accounts. Once the agreement is set, it’s set.”

Another rep described a situation where “We have a bit of a hybrid arrangement with one of our principals. They have their house accounts, but if an order goes through distribution, then we’ll receive a commission for it. It can get rather complicated and can result in split commissions.”

The point was emphasized that today there is a constant struggle to achieve better symmetry or balance when it comes to crafting contracts. “Unfortunately contracts in general are getting more and more one-sided. There are so many lawyers involved today and negotiations are getting more and more complicated.”

The conversation returned to the importance of strong relationships and communication when one rep maintained, “We agree on the terms of these contracts but then we’re afraid to talk about them with the manufacturer; that is unless it comes time for us to fight for something we feel we’re entitled to. For instance, I had an occasion where I was working for a rep and we were let go by the manufacturer. All that was left between us were hard feelings. At that time, the rep firm went back and complained that none of the expectations were outlined in the contract. Why didn’t the manufacturer provide us with some sort of notice that their expectations weren’t being met and then give us some time to rectify the situation?”

Establishing Expectations

Staying on the subject of expectations, another rep emphasized how important it was from the beginning of the relationship with a manufacturer to let them know what the rep firm is going to do for them. “For instance, you should let them know that you can deliver this many sales calls per month. That’s the type of exposure that manufacturers are looking for.”

Another participant in the chat made the point that “It’s important in your contract negotiations that you identify the manufacturer’s pain point and let them know how you can help them. At the same time, it’s important for you to let them know what it takes for you to do the job for them. There’s more to being a rep than just hanging up your shingle and taking people to lunches and dinners. You have to let them know the amount of time and money your effort involves. You are owners of businesses and you have employees and other expenses that you are paying for. Manufacturers should simply do the comparison. When you hire me, you don’t have to pay those six-figure salaries to your own direct sales force. You’re only going to pay a small percentage (commissions) to me.” It was emphasized that MANA provides any number of bullet points that emphasize what reps bring to their manufacturers.

Then there’s the subject of retainers, stipends and monthly or shared territorial development fees. The ALOTO group was quick to make the point that “No one should be expected to work for free. If a manufacturer had direct salespeople out in the field, they’d be paying them. At the same time, reps shouldn’t be expected to work for nothing.”

Pioneering Work

This is a point that was taken up in detail by a subsequent MANAchat devoted to the subject of whether and how reps should take on pioneering work for their principals.

At the outset of the discussion, one rep volunteered his experience with the subject this way: “This is something we deal with regularly. We’re always receiving inquiries from manufacturers that want to work with our firm. While they’re always talking about a lot of dollars and cents, we look at it by considering whether there’s something in it for us. Add to that the fact that it’s never as easy as they say it’s going to be. We’ve found that when there’s no existing business in a territory it’s going to take a lot more time and a lot more hard work than the manufacturer says it is. That’s why in the face of receiving no compensation for our efforts, we’re not afraid to turn away business. And, when it comes to determining the amount of compensation we require to take on the line, we’ve found that there are a hundred ways to skin a cat. For instance, we’ll try to focus on a flat rate fee for a specified period of time (e.g., one or two years). You can always scale that down over time.

“Whenever I have these conversations with prospective manufacturers, it tells me a lot about them. If they expect a lot of engagement with the customer, then we evaluate how much of our time that’s going to require and we’ll put a dollar value on it. It could be $1,000 a month or anyway up to $8,000-$10,000 monthly.”

While those comments proved to be an opening for the discussion, another rep was quick to weigh in with “It’s not unusual that a new manufacturer wants me to accept the line for nothing, and on top of that they don’t want to give me any customers that they’re already serving. The trick for us is to get them to give us some customers or provide us with some sort of a stipend or monthly starter fee. A lot of manufacturers just refuse to pay. Then you’re faced with a decision. Do they have a good product with potential, but they won’t give you any customers? Do you take them on anyway and hope to build the territory? At some point, however, you have to draw a line and determine whether it’s worth your effort or not.”

Monthly Payments

When it comes to discussing monthly retainers, another rep offered that the first sale you have to make on this subject is to sell the manufacturer. “You have to convince him that it’s worth his while to have some ‘skin in the game.’ We’re never going to live off retainers. I look at a shared fee or retainer more as just a draw against commissions. We can’t live off retainers. We use the retainer more to kick down the customer’s door than anything else.”

It was offered that a common refrain from prospective manufacturers is that they can’t afford to pay business development fees. To counter that one rep said, “They all say that, but you and I know they can. They’ll go ahead and hire someone for a six-figure salary to develop the market for them and then they’ll start to work with me. It simply doesn’t make any sense. Here’s the bottom line: if I don’t get paid a development fee from the manufacturer, then I’m not going to take on the line.”

The question was then asked what message can prove effective for reps when it comes to persuading manufacturers that such fees are called for. One rep quickly responded, “The position we take is that we have been in business for more than 40 years. We’re focused on the industry we serve, and we bring value (i.e., customer contacts) immediately. All that is worth something and we should be compensated.”

In conclusion, one rep offered his view, “Over the years we’ve turned down any number of manufacturers and lost opportunities simply because we tell them we’re not going to work for free. In general, it takes longer and requires more work than they expect in order to establish themselves in the territory. We’ve lost lines to other agencies that will take on a line for nothing. Looking at that situation, I’d urge every agency to recognize their value, know your worth, and have that conversation with the manufacturer so they know they should be willing to pay you for your efforts. The manufacturer should look at such fees more as investments. Look at the results that reps offer. Do the simple math. Reps sell more and the relationships last longer than those they have with their own direct sales force.”

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