I thought this column would be of much interest for our FBA sellers trying to negotiate exclusive sales agreements. Thanks, Cliff!
“I have started a new business that will act as a professional sales organization (PSO) for a much larger company that is selling services to professionals. We would receive a commission on the sales we make for this company.
I am expecting that they will send me a contract for review next week. What are some of the things I should be looking out for in that contract?”
First of all, since this is your first time dealing with a large company, you should have an attorney review this contract for you as very often these documents contain “traps for the unwary” that an unskilled eye won’t see.
Second of all, this does not sound like a true “reseller” agreement, where you are buying the large company’s services and then reselling them at a profit. If you are merely selling their services and taking a commission on the sales you make, that’s more properly called a “sales representative agreement” or “sales agency agreement.”
Looking at the contract itself, here are some questions you should ask your attorney:
Are we getting any exclusivity? You should try to negotiate an “exclusive” agreement with the larger company if you can. Exclusivity can take a number of forms. For example:
- you could ask for an exclusive territory (for example, “the northeastern United States”);
- you could ask for the exclusive right to sell certain specified products (since you are a small business, this may be granted only for the company’s less-popular or poorer-selling products); or
- you could ask for the exclusive right to sell to certain classes of professionals (for example, if the company sells to the medical profession, you could ask for the exclusive right to sell to “dentists” or “optometrists”).
Is it crystal clear how much and when we will be paid? You would be amazed how many contracts fail to spell these out in detail. Your commission rates should be clearly spelled out, along with any volume-related adjustments (for example, “X% for the first $1 million in sales, Y% for the next $1 million in sales, and Z% for sales over $2 million”).
Most “reseller” agreements will provide for monthly or quarterly payment based on sales during the preceding period, for example “within 30 days after the end of each calendar quarter for sales booked by Company during the immediately preceding calendar quarter.” Make sure you know EXACTLY when your monthly or quarterly commission checks will arrive.
Is the time period for payment reasonable? If the payment is monthly, requiring payment more than 30 days after the end of each month is unreasonable. If the payment is quarterly, anything over 45 days is probably unreasonable.
Do we have the right to confirm that payments are correct? You should ask for the right to review the larger company’s books and records at least once each year to determine if their payments have been correctly made.
Will we have the right to receive commissions even after the agreement is terminated? Most agreements of this type will allow the larger company the right to terminate the relationship at any time, for any reason, upon X days prior notice to you. Make sure that “notice period” gives you enough time to close any pending sales. Also, you should continue to receive commissions on any sales made during the notice period and for a period of X days thereafter as such sales were presumably the result of your hard work.
Will the company support us in our marketing efforts? While you will be doing most of the work, the larger company should agree to:
- give you a dedicated page or a “link” on their Website, or agree to forward to you any online inquiries from within your “territory”;
- provide you with enough copies of their printed marketing materials and product samples “on demand’ and without charge for you to use when selling to professionals; and
- give you access to their senior marketing executives for guidance on what representations and warranties you can make about their services (requesting this will make the company feel better about doing business with you).
Will we be able to work for other companies? Watch out for “noncompete” provisions that prohibit you from working from any of the company’s “direct or indirect competitors”. If the company insists on such a “noncompete,” ask them to name specific companies for whom you cannot work, and make sure the “noncompete” expires when the agreement is terminated.
Watch out too for “nonsolicitation” clauses that prohibit you from “soliciting or otherwise doing business with” the company’s customers after the agreement terminates. These clauses should prohibit you only from “diverting” to a competitor the customers you actually generated for the larger company.
When dealing with larger companies, remember the words of the late comedienne Jackie “Moms” Mabley, “the Lion may lay down with the Lamb, but the Lamb isn’t going to get much sleep.”
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.