Relationships between manufacturers’ representatives and suppliers are similar in many ways to a marriage. Before a contractual commitment, there is a courtship, a time during which both parties are able to examine their prospective partner during a variety of circumstances. If the attraction continues, both parties perform due diligence in order to ensure the absence of any nefarious dealings, both past and present. If a commitment is desired, both parties enter into a contractual relationship for the long-term. However, unlike a marriage, there is never a clause in a representative agreement that includes the words, “until death do us part.” Representative relationships are expected to last only for a period during which both the rep and supplier reap benefit from the relationship. Once a partner can no longer foresee a benefit from the relationship, the partnership may be dissolved explains california business attorney Steven C. Peck.

During the early years of a representative relationship, little fears on both sides can become irritants that grow, fester, and hold back both parties from achieving greater success. What can be done to reduce the impact of otherwise minor fears? Both parties can build into the representative agreement protection that shields them from some of their greatest fears. Manufacturers’ representatives often fear unjust termination by a supplier for whom they work diligently for several months or years with relatively little compensation. Suppliers often fear inability to terminate a rep whose performance has deteriorated. Both fears are real and can be addressed in the representative agreement in an equitable manner says california business lawyer Steven C. Peck.

If mutual success of the rep and the supplier is to be achieved, little fears on both sides must be dealt with in a manner that prohibits those fears from undermining performance. This paper addresses steps that can be taken to reduce fear on the part of both the manufacturers’ representative and the supplier. By building protection into the representative agreement, two objectives can be accomplished: First, some natural fears can be either reduced or eliminated. By reducing the impact of some fears, performance of both the rep and the supplier can be enhanced. Second, when the time comes to dissolve the representative relationship, the same protections that were used to enhance performance can be used to unwind the relationship with less acrimony and legal action says Los Angles business attorney Steven C. Peck.

Well Written Agreements Reduce Fear
Suppliers have a natural fear of manufacturers’ representatives. Simultaneously, manufacturers’ representatives have a natural fear of suppliers. Any solution to this problem cannot be developed unless these natural fears are recognized. A solution, therefore, must identify some of the most obvious fears and work to minimize the impact of their realization. A manufacturers’ representative might have a legitimate fear of being terminated if a small supplier becomes very successful and becomes acquired by a larger supplier. In most cases, the rep or the direct sales force of the surviving, (acquiring) supplier becomes the sales force of record and the rep of the smaller, (acquired) supplier is terminated. Termination is the result irrespective of performance.

Any manufacturer, large or small, may fear that the selected representative will not perform to expectations. If the gap between expectations and actual performance is too great, the manufacturer may need to change representation, but may feel trapped in a representative agreement that it feels cannot be changed easily or quickly. Well crafted representative agreements can relieve some of the fears of both reps and suppliers. We’ll explore clauses that can be inserted to help protect both manufacturers’ representatives and suppliers.

Protection for Manufacturers’ Representatives
One common fear among manufacturers’ representatives is that termination may come after months or years of hard work, but before significant commissions are generated. This a justifiable concern particularly where the supplier is relatively new and has no established customers. A rep must labor long and hard in order to create the first customers, designs and purchase orders. The world provides many examples whereby a small supplier signs up many reps that are required to provide several months of missionary work with customers before sales are realized. If the supplier provides a great product offering and executes well, its booming sales soon make it an attractive target of acquisition by a larger, more established competitor. During an acquisition, the sales organizations of the acquiring and acquired companies must be consolidated. Most often, the direct sales team or rep from the acquiring company survives, while the rep from the acquired supplier is terminated. Recognizing that history favors the reps of established suppliers, many reps are loath to adding start-up suppliers to their line card.

One solution that protects the manufacturers’ representative for a small start-up supplier is the insertion of a clause that provides commissions beyond termination in the event of a change of ownership of the supplier. The rep may be offered six-to-twelve months of commissions after the effective date of termination if termination is the result of a change of ownership in the start-up supplier.

The mechanism calling for extended commissions is sometimes called a “double trigger.” The term, “double trigger” is used in this case because two events must occur before the extra commissions are warranted: a) change of ownership, and b) termination of the representative agreement. If an acquisition occurs, but the rep is retained, there are no extended commissions. Similarly, if the rep is terminated, but there is no change of ownership, there are no extended commissions. When, however, termination occurs within weeks of a change of ownership, two conditions will have been “triggered” and the rep becomes entitled to extended commissions.

Inclusion of the “double trigger” clause removes the fear that reps might have when partnering with start-up suppliers. The expense of extended commissions become real to the start-up supplier only if it becomes very successful and simultaneously becomes acquired. The extended commissions can be easily justified and in addition, can be spread forward in time.

At first glance, extended commissions from a double trigger clause result to the benefit of the manufacturers’ representative only. Upon deeper reflection, the start-up supplier benefits also. Without a double trigger clause, large and established rep organizations avoid start-up companies because of the risk that they represent.

Without the clause, a start-up supplier might be forced to select a rep from among a group of smaller and less established rep organizations. Inclusion of a double trigger allows start-up suppliers to add powerful manufacturers’ representatives to its sales team. Such an addition increases the suppliers’ chances for success.

About the Author

Attorney Steven Peck has been practicing law since 1981. A former successful business owner, Mr. Peck initially focused his legal career on business law. Within the first three years, after some colleagues and friend’s parents endured nursing home neglect and elder abuse, he continued his education to begin practicing elder law and nursing home abuse law.