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No one likes to think about the potential end of a business relationship just when they finally succeeded in getting it off the ground. But for independent sales representatives, addressing the rep’s termination rights at the beginning can make the whole relationship with the principal work better, can extend the duration of the relationship and can protect the rep’s investment of time and resources in developing business for the principal.

So, you’re a rep in contract negotiations with a new principal that could substantially expand your business and bottom line. Great! You’re probably focused on primary issues like commission rates, territory, and just getting down to work. But what happens if the relationship sours or the principal decides to part ways? Most people don’t like to think about what might go wrong during the life of the contract, especially when they are only beginning the relationship. While it might be uncomfortable to consider worst-case scenarios, giving due consideration to how the relationship may end or what might occur after the end of the relationship may ultimately pay dividends.

Consider and be guided by past relationships with your principals which have resulted in what you may consider to be an “unfair” outcome — or stories you’ve heard from other reps. Perhaps you lost out on commissions for an order you worked for a year (or more) to obtain because the principal terminated the contract just before the customer placed the order. Maybe the principal terminated the contract after a customer issued a one-year blanket order for products but before any products were paid for or shipped. Or perhaps your representation was terminated just as you were solidifying a relationship with a large account that was primed to make orders long into the future.

In any of these cases, you likely lost out on commissions you worked hard to obtain. While some jurisdictions may have statutes that provide certain limited termination-related protections or may entertain legal claims on a “procuring cause” theory, don’t take a chance by relying solely on those potential protections. Having specific, enforceable contract terms governing what happens with orders or accounts after termination is much superior.

The underlying concept is simple: if a “low cost” exit is available to the principal, the principal might be more tempted to not only push their weight around during the relationship, but also to terminate rather than pay a rep who has sourced a large account or order. If there is a higher cost to terminating the relationship — like a long “sunset” or “tail” provision entitling the rep to commissions on procured accounts or orders for a period after termination (perhaps several months, or in rarer cases on a lucrative “life of part” or “life of customer” basis) — the rep is likely much better positioned throughout the life of the contract.

The Need to Negotiate

Depending on the sophistication or size of the principal, it’s certainly possible that the rep will be presented with a standardized contract with potentially onerous, one-sided terms. Some reps may have the clout to negotiate more favorable termination terms off the bat; others may not. But don’t shy away from engaging the principal — thinking creatively about how to create leverage in these contract negotiations can be helpful.

For example, consider whether contract terms that are on the principal’s more immediate radar (rates, territories, house accounts, splits) can be compromised or manipulated to some degree to obtain more favorable termination terms that may ultimately have greater long-term impact. If the type of product being sold requires long design or build-in periods, and you have the necessary, in-demand expertise to guide the customer and the principal through that process, then a longer tail period or other guarantees are likely warranted.

It can also be possible to obtain “phased” termination provisions by which the commission tail period is extended by certain increments, perhaps increasing with each anniversary of the representation or on achievement of specified sales goals. This “quid pro quo” style concept can be applied to other aspects of the relationship, including individual accounts — perhaps a commission tail provision for any orders of a certain size or duration or for accounts the principal designates during the relationship as a “house account.” It’s even possible to negotiate different plans for post-termination compensation based on the different potential reasons for termination (for example, an increased tail if the principal’s business is sold or if management is changed, and an abbreviated tail for a “for cause” termination). There is no single right answer or method when it comes to termination terms — there are many potential chips that can be played.

Of course, while the termination term by itself may prove to be extremely important, it is not the only issue to consider at the beginning. Concerns such as backorders, sales cycles and lead time, a principal’s potential shift to direct sales, possible changes in ownership or management, and non-compete provisions can and should be addressed at the outset, alongside commission rates, territories, splits, and any exclusions. Playing out the potential twists and turns through the entirety of the relationship can help the rep all the way along.

When negotiating your contract, it’s advisable not to do it all on your own — terms that you think might be airtight or clearly worded may be considered otherwise if it comes to a legal dispute. It’s helpful to have legal counsel experienced in sales representative matters on board to either participate directly in discussions or to coach behind the scenes. Experienced counsel will also have knowledge of the various state statutes that can apply to representative-principal relationships that can be of great use when developing your contract. MANA maintains a nationwide roster of attorneys standing by to assist you — an invaluable resource for protecting your interests when establishing a business relationship.

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