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In the 72 hours before I sat down to write this article, the owners of three different sales representative agencies called me with concerns because one of their manufacturers was being purchased. These acquisitions often take sales representatives by surprise, asking themselves what rights they have and what will happen next.

What to do and not to do when one of your manufacturers is sold will be the subject of a future article for Agency Sales. But the purpose of this article is to get you thinking about how to anticipate the possibility of your manufacturers getting sold, plan for it, and use it to your benefit. This is not a pie in the sky idea. Successful sales representatives routinely negotiate change of control provisions and I have seen the six- and even seven-figure payoffs that resulted from them.

What Is a Change of Control Provision?

The basic premise of a change of control provision is that you enter into an agreement, usually at the outset of a relationship as part of your sales representative agreement with the manufacturer, in which you and your manufacturer establish what will happen if the manufacturer undergoes a change of control.

Change of control provisions can take many forms. Ideally the sales representative gets a payment even if it stays on, though manufacturers often try to tie payment to termination. Usually the payment is a function of past commissions or sales, or future sales (note that tying the amount of a payment to future sales can be risky). Sometimes change of control provisions give sales representatives the right to stay on, and even take on the products of the acquiring (or acquired) company. Often a simple formula based on past performance is best, because there is less uncertainty and it is easy to calculate.

Common change of control agreements involve:

• A payment based on past performance in the event of a change of control (for example, the sales representative receives a payment based on past commissions or future sales). Some sales representatives are also able to get stock options that become valuable when the company is sold.
• An agreement that the acquiring company can hire members of your sales force in exchange for a payment (note, this is usually possible only if you have carefully drafted agreements with members of your sales force prohibiting them from going to work for your manufacturers.

As with many contract provisions, the devil is in the details, and great care must be taken to ensure that the definition of what constitutes a “change of control” and triggers your payment is drafted to best protect the sales agent. Manufacturers can avoid paying lucrative change of control payments because the complex structure of a sale did not meet the technical definition of “change of control” in the contract.

Why Is a Change of Control Agreement a Win-Win Proposition?

Sales representatives are critical to the sale of a company. A company’s sale price is a function of its revenue, and that revenue is a function of — you. In other words, the more you sell, the more the company will sell for.

By recognizing that your work in building a manufacturer to a level that makes it an attractive acquisition target and the valuation of a manufacturer is a direct function of the sales you generated, you should share in the benefit of the manufacturer’s sale.

Any company can be the subject of a change of control, but sometimes you should anticipate that a manufacturer is likely to be sold. When you start talking to potential new manufacturers, there are clues that they will be sold. Startups are often looking to grow to a certain point and then sell to a competitor or another company in the same industry. Manufacturers with venture capitalist investment or that are owned or funded by private equity firms are often on the lookout for buyers; private equity firms commonly buy companies to make them more efficient, increase their value, and sell them.

When you agree to sell the products of a company that is likely to be sold, you do so knowing that once the company is sold, you will probably be terminated. If the company is sold to a competitor or a company in the same industry, the buyer will likely have its own sales force and you will be cut out. Another risk is that the company will sell direct, through an employee sales force, and will want to hire members of your sales force as its own employees.

You are best positioned to negotiate valuable change of control agreements if you are an established representative or agency with long and deep relationships in the industry and the territory. Your knowledge and relationships mean you can help the manufacturer build sales quickly. The sales you generate increase the sale price of the company. The change of control payment ensures that you receive value for what you helped create.

When Should You Negotiate Change of Control Provisions?

The best time — indeed often the only time — to negotiate an agreement about what happens in the event of a change of control is before you start selling a new line. Once you are already representing a line and have agreed to certain termination provisions, you will have little power to negotiate unless you can move to another company.

Conclusion

As a commissioned sales representative, your business’ value is its relationships with its manufacturers, customers, and members of your own sales force. If your contracts with manufacturers allow you to be simply terminated in the event of a change of control without any compensation, you are effectively agreeing to give away all of those relationships for nothing. By negotiating change of control provisions, you can protect and monetize those relationships, and dramatically increase the value of your business.

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