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When sales reps enter into a new contract with a principal, they’re understandably most focused on what’s happening right now:

• Will it be an exclusive?
• What will the territory be?
• What will the carve-outs be?
• What will the commission rates be?

Few sales reps focus on what will happen when the relationship will end. And make no mistake, it will end — the question is when and what will happen when it does.

Fast forward some years, when some of the excitement of the new relationship has subsided. You’ve spent huge amounts of time, money and resources to develop sales of the principal’s products in your territory. You’ve earned quite a bit in commissions, and your principal has profited handsomely from your efforts. Then, it happens: The principal changes ownership or management and now wants to go direct. Or the principal starts thinking you’re making too much money — or that you will make too much money as soon as that big OEM order you’ve been working on for months comes in.

What disincentive does the principal have to keep it from terminating you? How will you be compensated fairly if there is a termination? What about those soon-to-be-issued orders you’ve worked so hard on? What about that blanket order you won just a couple of months ago? Will you receive any commissions for your efforts after termination? These important questions, and more, should have been answered at the beginning of the relationship, not at the end. Sales reps will benefit throughout the relationship from paying careful attention to the end at the beginning.

Don’t Let the Principal’s Lawyer Set the Terms of Your Termination Clause

Typically, new sales reps negotiate their business terms with the new principal’s owner or distribution manager. Territory, exclusivity, commission percentages, splits and house accounts are usually thoroughly discussed. Less often discussed is the termination clause, but it is just as important.

What happens next is that the owner or distribution manager typically turns over the business terms that were negotiated to the principal’s lawyer, who often is a general corporate attorney who has little familiarity with sales rep issues. The principal’s lawyer is often under pressure to keep legal fees to a minimum, so he most often starts with his own version of a standard template, which is often cobbled together from past contracts and elements from published contract templates. The only terms changed may be the date, the names of the parties and the business terms as reported by the owner or distribution manager who negotiated them. Unless the termination provisions were among those business terms negotiated between the sales rep and the principal, the termination clause is likely to be whatever the attorney thought was most protective of his client, the principal.

The lawyer likely will have little or no consciousness of the lead time to create sales, backlogs of customer orders, or many of the other practical considerations of the sales cycle that the sales rep and the principal know well. Instead of taking those concerns into account, in order to protect her client, the principal’s lawyer will draft the agreement to include a termination provision that gives as much flexibility as possible to the principal to initiate a termination at the lowest possible cost, which means cutting off the principal’s obligations to the sales rep as fast as possible after termination.

That bad termination clause could have been avoided by negotiating it with the person who is sensitive to sales cycles, lead time, backlogs and all those practical considerations — the principal’s owner or distribution manager. A principal’s lawyer rarely will override the business judgment of his client — the lawyer generally accepts the business terms provided by the principal and incorporates them into the draft agreement. So get the termination terms you want into the agreement before the principal’s lawyer has a chance to impose his own principal-protective version. The beginning of the relationship is the time to negotiate the termination clause, not later.

The Termination Clause Affects the Entire Relationship from Beginning to End

The termination clause (here meaning the clause that allows the contract to end upon expiration, non-renewal or notice without cause) is usually taken into account by the principal long before the termination actually occurs. A principal who demands unfair discounts, forces unfair commission splits, or pushes dubious house accounts onto a sales rep generally has considered the ultimate cost of the rep being terminated or quitting. The principal has assessed the risks and costs of such a termination — not only what will happen in the market, but what will the principal have to pay to the sales rep and for how long? A termination clause that gives the principal a right to a quick and easy end with low post-termination commissions is one that allows the principal more freedom to have its way, fair or not, with the sales rep throughout the relationship.

To the principal, the ultimate risk of a sales rep leaving may not be that bad — it may even be preferable outcome — because the sales rep is likely to get little or no compensation. But to the sales rep, a bad termination clause is a train wreck waiting to happen.

Negotiate the Termination Clause Like You’re Repping Yourself

The sales rep would do well to think through all those bad scenarios she has experienced or heard others talk about. Did you lose out on the commissions for an order you worked on for months because you were terminated just before the order was signed? Or worse, because the order was signed but not yet accepted by the principal? Did your principal terminate your contract after the customer issued an order for the first year of a multi-year requirements contract? Did the agreement require the principal to only pay commissions for product orders delivered within 30 days after termination, when the lead time for product delivery is 90 days and the principal controls the delivery date? Make all those bad experiences work for you by thinking hard about how to avoid a repetition when you are negotiating basic business terms with the principal’s owner or distribution manager. An extra half-point commission will not help you avoid those kinds of problems, but a good termination clause will.

Consider as well other factors, such as whether this is a new market or new territory — the additional development effort should justify a longer initial term, a longer “no termination without cause” period, or at least longer commission entitlement for backlog orders after termination. How about an extra 30 days of post-termination commission entitlement for each year you extend past your initial contract term, up to a maximum of 180 days? Alternatively, taking over an existing territory invites sales goals based on historical sales. That is a good opportunity to negotiate an extended termination runway if sales goals are met or exceeded. For example, you could negotiate an extension of 30 days of post-termination commission entitlement ever period (e.g., quarterly or semi-annually) that you exceed sales goals by two percent, up to 180 days. That is an easier trade to negotiate than an increased commission — it has no immediate cost to the principal, does not affect near-term profit performance for the principal’s negotiator, and it signals your confidence and motivation to exceed sales goals.

Overcoming the Objections

But principals are likely to resist, you say. Perhaps. Don’t you hear from customers that they don’t want to buy your products because someone else is selling a competing product cheaper, faster, better? Do you walk away, or do you try to address and overcome the customer objection? If you’re reading this article, it’s likely because you’re a successful salesperson who overcomes objections. Do what you do best, and work for your own interests to overcome the principal’s objections. Recall that the principal vetted and selected you over other candidates — how much time and effort did the principal already invest in that project? That was an investment in you as the principal’s preferred sales rep, and it will not likely be thrown away lightly. Don’t be afraid to note for the principal that the termination clause costs the principal nothing at the present and hopefully will never even be used. And do not just passively accept a response from the principal that “our lawyer said no, we have to use our standard contract.” Remember that the lawyer works for the principal and the lawyer is not likely to override the principal’s business decisions.

When All Else Fails

So what do you do when the principal simply won’t listen to reason and won’t budge on the termination clause? Consider it a red flag. If the principal will not be reasonable and discuss a compromise with you on an important term such as the termination clause at the beginning, things are not likely to improve while you represent the principal. They will more likely get worse, as the principal has already shown you he has no intention of taking your interests into account. If you do proceed with the principal, you should do so only after making a conscious assessment that you recognize the risk and will be continuously vigilant to protect yourself. Protecting yourself includes being conscious about the percentage of business this principal represents to you, and by quitting the principal promptly when things start to go south.

An Ounce of Prevention….

In all events, sales reps would do well to consult with a qualified rep lawyer before signing the sales rep agreement that was likely prepared by the principal’s lawyer. Even a well-negotiated termination clause can be undermined by trapdoor terms, like those that restrict when the commission is considered earned. A brief review by a qualified rep lawyer at the beginning could save you considerable trouble when the relationship reaches its end.

The authors were speakers at the Negotiating the Termination Clause MANA/SalesWise teleforum in February 2019, which is available to MANA members in the member area of the website.

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