When you are hiring new independent sales reps, the most important thing to get right is the sales rep contract. The sales rep agreements set the basis for your potentially long term business arrangement with every new sales rep.
The sales contract is for the protection of both the manufacturer’s rep, as well as the principal. We strongly recommend entering into a formal contract with your sales reps, which will lead to a much better understanding of the obligations that both parties have. A contract will vary significantly depending on industry, but there are several key parts that should be included in every contract. These include:
- Responsibilities – You need to clearly define the role of each party involved in the contract.
- Define Independent Contractor – It must be clearly stated within the terms of your contract that your independent sales rep is a contractor, not an employee.
- Compensation and Commissions – This is very important! You need to be very specific in terms of commission based on a percentage of gross or net sales. In addition, a good faith clause should always be included. Depending on the volumes involved in an order, and the kind of competition involved as well, orders will often require discounts. In these cases it can be difficult to define commissions, but your sales reps have to be given flexibility in order to close a sale. A good faith clause states that in cases where the rep has to offer additional discounts, it may be necessary for the rep to take a cut in commission, and that any such commission reductions shall be negotiated in good faith. As incentive, we suggest that commissions increase with sales volume. This may lead to defining a quota and the commission structure based on how these quotas are met or exceeded. Not surprisingly, reps will put more time and effort into a line if it will provide them greater return.
- Termination – If the contract is terminated by either party, provisions for commissions paid on pending and existing orders must be provided.
- Non-compete – For technical or industry specific products, you may also want to draft a non-competition clause. You definitely do not want your independent sales rep to develop a good customer base, and then have him/her switch to a competing principal.
- Territory – Most sales reps will want a defined territory. We suggest doing this by either geography or industry type.
- Product Improvements – Because of their experience in the field, independent sales reps may sometimes have ideas in how to improve your product! You need to make sure that it is clearly stated that the principal takes ownership of all product improvements made by independent sales reps that are implemented.
- Confidentiality – If you have trade secrets or some type of technical advantage over competitors, you will want to include provisions for confidentiality.
- Liability – A contract must define liability issues with product use, negligence, and so on.
- Dispute Resolution – Provisions need to be included such as governing state laws and attorney fees.
I am selling Compressed Natural Gas fueling stations to Fleet operators who want to save money and reduce emissions.
These contracts will be from 3-8 years long, due to the high infrastructure costs that the company needs to recoup.
The Sales cycle is also very long, because these are big$$ decisions, which will need to go to the Board. Alot of education is involved.
Contracts typically expand over time as the fleet grows.
If I only get commission on gallons sold, I will starve, in years 1-3, by year 4 all is good.
It has been suggested that I ask for 50% to 80% of the total 8 year commission in year 1, with a 20% residual.
Maybe I should just be on salary with some type of commission on sales??
Any help would be appreciated.
Unfortunately I don’t have direct experience with these long-cycle sales deals. I have contacts with some in such areas, and they have had to arrange their business so that the big payoffs that come infrequently can be accommodated into the cash flow. That usually means several such deals as well as shorter cycle deals to tide your over the long spells. But I know that when “their ship comes in”, it has made the wait worthwhile.
Your suggestion of the front loading of the commission is also workable, and might be treated by the payer as an advance. Whether they would be willing to pay the front loaded amounts would depend upon your reputation and credibility. But at least it helps spread the risk.
I have been asked to be an independent rep for an elderly couple who have made a food product that is selling in many other states but not yet in mine. I will be introducing it into a large city. The arrangement is extremely loose. The current deal is I get a small amount equivalent to about 9% of wholesale on each item ordered. There is no set agreement other than that and I need to firm it up. My job is to find buyers then leave it to the principal to deal with them after the first order which will go through me. The principle will send me all invoices so I know what is being ordered. Is this sufficient?
My question is for how long should I get commission on products ordered if I only ever visited the shop once? They might go on ordering this product for many years – should I get commission ongoingly? If so what happens when my principal gives up or sells the business or passes on- an awkward issue but age is involved here. They have a younger partner now- should he sign any agreement made as well- he might take it over later I guess?
Any help greatly appreciated.
As far as the Sales Representation Agreement goes, it is better to have the concepts clearly established and in writing. We have a sample Representation Agreement on our website at https://www.rephunter.net. You get access to the agreement when you create free profile.
You could trim the agreement down if you want to keep it simple. But it is strongly advised to have something in place which spells out the terms as well as the responsibilities of each party.
Your commission rate is within industry norms, although it could be slightly on the low side if you have to “create a new market” for the product.
Regarding ongoing commission: if there is any possibility of a motivation factor to keep customers happy and build sales, commission should be ongoing. From your point of view, you would like more than a “survival compensation”, but something that improves over time. You should be motivated to help the business grow if you are growing too. Your principal should be given the opportunity to see it this way also.
Regarding the longevity of the business and the principal: that is something you will have to take into account from your own perspective, as our opinion is probably too far removed to be meaningful.
Hope this helps!