A sales representative agreement is always advisable to have in writing, and some states require it by law. As a sales rep, this type of agreement will establish your relationship with the supplier and define expectations and obligations for both parties. It’s crucial that you understand the material terms of your agreement prior to signing (i.e. compensation, territory, exclusivity, renewal, and termination) and that you review it periodically after it’s been signed (and not just at the end of the relationship).
The following provides basic guidelines regarding sales representative agreements and an explanation of critical provisions. At the end, you’ll find a checklist to use when reviewing your own agreements. While this document contains an explanation important parts of a sales rep agreement, when drafting and/or reviewing your own sales representative agreement, parties should always first consult with any relevant state statutes and legal counsel.
This note also assumes that the sales representative is an independent contractor, that the transactions take place exclusively in the United States, and that the terms are being used in a business-to-business transaction. Last, the terms are not industry specific, and there may be additional requirements based on your particular industry not discussed. This note is for educational purposes only and not to be substituted for legal advice.
Compensation
Key Compensation Terms
Sales representatives should focus on three main items in terms of compensation when negotiating and/or reviewing their sales representative agreements:
- The sales representative’s compensation structure during the agreement’s term.
- When the sale representative earns and is paid his or her commission.
- The sales representative’s compensation structure on termination.
Compensation Structure
One of the most important terms in a sales representative agreement is compensation. Again, this is an item that is typically required by state law in states with sales representative statutes but should always be included even in the absence of state statute. It’s critical that you understand your own commission structure.
Sales representative sales compensation can be structured in three different ways:
- Fixed Commission. The supplier pays regardless of the sales representative’s sales performance.
- Contingent Commission. Commission either based on a flat commission rate or a variable commission rate, based on the sales representative’s performance. Sometimes referred to as a “straight commission.”
- A combination of fixed and contingent compensation.
Payment Terms – When Commission is Earned and Paid
In addition to setting forth compensation structure, a sales representative agreement should always include payment terms. Payment terms can be either traditional payment terms, or pro-sales representative sales terms depending upon parties’ negotiations and individual circumstances. Under traditional payment terms, the customer typically pays the supplier the price of goods, and the supplier than pays the sales representative commission only after the supplier has been paid for the goods (though sometimes parties may negotiate that the supplier pays after the order but prior to receiving payment). Under pro-sales representative payment terms, the supplier will arrange for the customer to pay the purchase price of the goods to the sales representative directly, after which the sales representative deducts its commission and forward the balance to the supplier. The latter is less common but may be appropriate in circumstances where the supplier may not be creditworthy. In most sales representative agreements, the sales rep earns its commission only when the customer pays the purchase price for the goods in full. In either case, the sales rep should never have an obligation to collect payments under any purchase contract.
The agreement should also instruct how and where the supplier should make commission payments to the sales rep – e.g. wire transfer, corporate check or ACH electronic payment.
Commission Structure After Termination.
Sales representative agreements should also include terms which speak to commissions after the sales representative agreement is terminated. Whether and when a supplier has an obligation to pay commissions under certain termination provisions may be negotiated between parties. Some states have statutes that require payment within a certain amount of time.
Parties’ Obligations
The sales representative agreement should spell out both parties’ specific obligations.
Supplier Obligations
A sales representative will want to know specifically what the supplier’s principal obligations to provide the sales representative with the support he or she needs to market the products. The supplier should also provide the sales representative with periodic (typically quarterly) commission reports.
Sales Representative Obligations
The obligations of the sales representative may vary from agreement to agreement, but typically will include provisions relating to marketing and advertising the products, providing limited customer support, obtaining any necessary licenses or permits, and prohibited acts. You’ll want to be clear on your obligations under the agreement.
Territory & Exclusivity
A sales representative agreement should define your geographic territory and also state clearly whether or not the agreement is exclusive or non-exclusive within that territory.
Terms & Termination
The sales representative agreement should speak to the term (i.e. duration) of the agreement and how the agreement can be terminated (whether by expiration or by either party). The term of the agreement should reflect the sales cycle for the territory and/or your products. The agreement needs to give you enough time to develop sales and recover commissions, and also should provide for the payment of post termination commissions that reflect the sales cycle. You should insist that commissions for all orders received through the effective date of termination be paid, regardless of when shipped or paid for by the customer.
Insurance & Indemnification
Indemnification provisions are important risk allocation mechanisms and are typically heavily negotiated. A supplier should indemnify, defend and hold harmless its sales representative(s) from any and all claims arising from or relating to the supplier’s products, including claims involving product liability, intellectual property infringement, warranty issues, and violations of law relating to the products. The supplier may also require indemnifications from its sale representatives.
The supplier should carry insurance in a sufficient amount of insurance to cover the above indemnification and should name the sales representative as an additional insured under the supplier’s product liability policy. The indemnification provision should always survive termination of the sales representative agreement.
Representations & Warranties
Parties will often include a standard series of representations and warranties. These will typically relate to the legal status of the parties, the capacity of the parties to enter into the transaction, and the enforceability of the agreement. You will want to make sure that all representations and warranties you provide are truthful and accurate.
In some cases, a sales representative may require additional representations and warranties from the supplier if the sales representative is concerned with the supplier’s ability to fulfill purchase orders or pay the commission.
