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.