Dependable representative agreements can delay the deterioration of representative relationships and reduce the likelihood and scope of litigation upon termination. Delayed deterioration and less litigation can add to sales and profitability for both the supplier and the manufacturers’ representative. By applying proven ideas when drafting and negotiating that next rep agreement, sales and profits can improve, the life of the rep relationship can be enhanced and extended, and the need for litigation upon termination can be reduced or eliminated. Paying attention to the guidelines here can improve satisfaction with rep agreements and can increase the return on investment made in rep relationships, even if one or more of those guidelines are ultimately ignored. Ideas expressed here are applicable to both suppliers and reps.
Avoiding Exclusivity
Creating an exclusive relationship with a new manufacturers’ representative poses great risk for the supplier and not little risk for the rep. If the relationship does not succeed, a supplier has no alternative but to terminate the rep, search for and select a new alternate sales partner, and sign a representative agreement with a new rep. If a rep demands exclusivity, there are multiple ways to handle the situation: First, avoid use of the term “exclusivity” in the rep agreement. Parties may agree verbally to an arrangement where, if sales objectives are achieved, the rep will enjoy the sales territory to itself. A competing rep would be added only in the event that mutually agreed objectives were not met. Second, divide the territory into two or more lists of customers. Provide the first rep an exclusive list of customers for which it has complete responsibility. Provide a second rep in the same territory with a different list of customers. If a need arose, the lists could be amended at the time of annual renewal. The supplier may choose to carve out a limited number of customers that it services on a direct basis, bypassing the rep. Third, the least flexible sales agreements call specifically for an exclusive territory, where the rep is allowed to sell to every customer in a defined geography. If sales issues arise with specific customers, or if performance of the rep proves inadequate within a specific sector of the sales territory, the only option to repair the situation is to terminate one rep, search for, and select a new rep. The supplier faces risk, since every customer is forced to accommodate the change of a rep, including those customers that have a good relationship with the terminated rep. The rep encounters risk in the form of lost commissions and a foreshortened line card.
As an example, a supplier signed an agreement with its first manufacturers’ representative in Asia with a territory that spanned eight countries. The rep had offices in Hong Kong and Bangkok. During the first year, the relationship deteriorated because the supplier learned that the rep had no presence China and Korea, and that it had no customer relationships there. The supplier learned that China and Korea were its two most important Asian markets. Upon discovery of the rep’s lack of presence in the markets that the supplier valued highly, the supplier felt obliged to terminate the Asian rep. The supplier was bound by an exclusive representative agreement in eight countries. Had there been no exclusivity clause, the supplier could have sought out, negotiated with, and signed an agreement with a second rep in those countries where the first rep had no presence. With the exclusivity clause in the agreement, the supplier was disallowed from engaging a second rep in a limited number of countries while simultaneously retaining the original rep.
Too Much Too Soon
Every new partnership between a supplier and a manufacturers’ representative is born in a period of bright optimism. By matching up with a new rep, a supplier is prohibited, either by terms of the agreement or standard practice, from signing a contract with an alternate rep in the near term. By aligning with a new supplier, a rep is prevented from immediately engaging an additional supplier. It is important to assign a territory that is not immediately too large. If a rep is proven in only a small territory, it is not prudent to assign a large territory and hope for the best. A better approach would be to open a new sales relationship in that rep’s proven territory and expand the territory gradually, after results in the smaller territory suggest that an expanded geography is wise. In the example above, the supplier handed over almost all of the Asian market to a rep that had no presence in the majority of the eight-country territory. The supplier granted too much territory to its selling partner too soon. A safer approach is to grant multiple reps smaller territories. Allow reps to demonstrate their capabilities in proven markets, and then, through a process of natural selection, disengage with the weakest reps. This allows the supplier to enlist new reps in underrepresented territories, or to expand the territories of those reps that have excelled in their initial geographies.
Termination for Cause and Convenience
Suppliers and manufacturers’ representatives must be allowed to manage their respective businesses with minimal intrusion from their partners. Both must have the opportunity to upgrade their respective network of reps and suppliers. This opportunity is enhanced with the ability of both parties to terminate the other for cause and for convenience. Termination for cause is mandatory in order to accommodate situations when there is breach of the contract and failure to remedy the cause within a term specified by the contract. Termination for convenience, sometimes called termination without cause, allows either party to terminate the agreement when business reasons dictate. Problems frequently arise when only one party is allowed the ability to terminate the relationship. Such one-sided arrangements create an imbalance in the relationship. Imbalance spawns mistrust that weakens the relationship and undermines performance. The best practice demands that both parties have the opportunity to terminate the agreement for both cause and convenience.
Comparison with Proven Industry Agreements
Most mistakes written into representative agreements are made by parties lacking experience with creation and negotiation of those agreements. Most established reps and suppliers with years of experience handling agreements rarely write mistakes into those contracts. Many mistakes are the result of one partner attempting to gain advantage over the other partner by inserting a bias into the agreement favoring the party with greater experience. This naïve practice often fails to produce the results desired.
How does an inexperienced party to representative agreements level the playing field during negotiation? There are several methods: First, solicit a model agreement from an industry trade association. Many associations provide a model agreement free of charge or at modest cost to their membership. The model is a good baseline with which to compare the agreement being presented by a prospective sales partner.
Second, use a network of friends in the industry. Although it is unlikely that an executive would lend a direct competitor a copy of its standard representative agreement, friends at indirect competitors rarely fear sharing an agreement that has proven over time to be problem free.
Third, when attempting to sign a representative agreement in a foreign land, use a foreign network. American chambers of commerce can be found in most countries around the world. If your foreign subsidiary does not yet have a connection with the American chamber of commerce, initiate one immediately. The cost of membership in these organizations is miniscule and the benefits extend far beyond learning how to negotiate a sound rep agreement. Members of a foreign chamber of commerce are often eager to help fellow members. Ask them for examples of time-proven sales agreements.
Fourth, ask the supplier or rep with which you are negotiating an agreement for a blind copy of two or three agreements that are currently in effect. You need not know the name of the parties in those agreements; you are just looking to establish a feel for what is considered normal. (continued on page 2)
