Building Value into Representative Agreements
By Glen Balzer
Submitted April, 2005
The value of a partnership between a supplier and a manufacturers' agent reflects dramatically upon the quality of both partners. A representative agreement that binds both parties to the partnership may enhance or degrade a representative relationship. It is important to exercise care when negotiating the agreement in order to ensure that it promotes the positive aspects of the relationship in an evenhanded fashion.
Partnerships between suppliers and manufacturers' representatives migrate through a cycle much like a product life cycle. Partnerships are born during a period of courtship during which a partner promotes and observes only the most positive aspects of each partner's personality and character. The relationship's sales and profits grow and develop. The relationship thrives and then matures. Decay and decline follow the maturation process. Ultimately, all partnerships expire. A well-crafted representative agreement can accomplish three objectives: First, it can improve the quality of the relationship during all phases of the life cycle. Second, it can assist in avoiding the premature death of the relationship. Third, a well-written agreement can mitigate legal expense, management time, and corporate distraction when the partnership ultimately expires.
The atmosphere is jubilant and sometimes euphoric during the creation of a representative agreement. As a result, it is easy to overlook or omit sections of the agreement that are critical to an agreement's long-term success. Identifying missing sections of an agreement is analogous to observing a dog that does not bark. Most observers will not notice the dog's silence. Be careful to ensure that all dogs are present, irrespective of their noise.
Well-seasoned suppliers and sales agents have sufficient experience to shun one-way agreements. Far too often, less seasoned partners attempt to draft agreements that favor one party at the expense of a less experienced partner. Lack of balance in agreements brings about two problems: First, naive partners ultimately become aware of an agreement's one-sided treatment. Recognition of imbalance in the agreement usually leads to suboptimal performance. With an unbalanced agreement, it is difficult to repair and even discuss problems in the working relationship without creating additional strife.
Problems persist and the list of irritations between the supplier and representative expands.
Second, when a decaying relationship approaches its end of life, unbalanced agreements have a greater tendency to become the subject of litigation. Both partners in an agreement require a philosophical attitude. Although deconstruction of a business partnership is not pleasant, partnerships do not last forever. Termination is a natural aspect of all partnerships. All relationships and representative agreements end. Of all decaying partnerships that enter a litigation process toward their end of life, few survive. Most legal skirmishes involving termination of representative agreements yield the same three results: 1) Management of the representative and supplier must spend considerable time with legal proceedings, pleadings, preparation, and trial or settlement. 2) The sales agent and supplier must spend significant financial resources to minimize determined by the court. That financial cost comes at the expense of not investing in activities that are more productive. 3) The relationship is terminated. The variables in this process are the amount of money and management time that must be spent defending partners' pride, honor, and legal position. The irrevocable outcome in the process is recognition that the supplier and manufacturers' agent no longer have a partnership.
The lesson learned from witnessing several legal skirmishes involving the termination of representative agreements is that unbalanced agreements usually serve neither party well.
Although an author may insert disequilibrium into an agreement to achieve an advantage over a partner, the cost at termination involving a legal proceeding is overwhelming. The best method of avoiding a legal altercation at termination is ensuring that a representative agreement contains equilibrium in the relative power between the representative and the supplier. Balanced agreements reinforce the positive aspects of the relationship.
Finding omissions in a representative agreement is arguably more difficult than achieving balance. The process requires discovery of clauses that are absent and invisible. Some relatively simple techniques can eliminate omissions. First, a company can draw upon the cumulative experience of the executive team to review the agreement before signing the document. It is likely that one or more of the executive team has had some experience with representative agreements. Painful lessons survive indefinitely. Second, a company can confer with leadership of the industry's trade and representatives' associations. These groups are generally enthusiastic to help with the construction of sound agreements. Third, if a number of agreements from within the same industry are collected, the executive responsible for signing the representative agreement can compare the agreement under consideration with competitive agreements.
Building a library of competitive representative agreements is a sound business practice. Comparing a number of agreements can lead to the creation of a best industry practice.
Comparison of a company's agreements with others in the same industry should become a routine practice that continues long after the first agreements become effective. Periodic review of industry agreements can help the supplier or representative keep up with changes occurring in the industry. The world never stands still. Terms change over time. Commission rates migrate. Appropriate conditions in yesterday's agreement become out of step in tomorrow's business environment. By developing a library of representative agreements and applying the energy to keep it current, a company can ensure that it remains competitive.
Drafting, approving and signing a representative agreement should neither be rushed nor taken lightly. A sound and balanced agreement will help a supplier and manufacturers' representative grow in stature, sales and profits. The proverbial ounce of energy applied during the review process is worth more than the pound of remedy at the end of an agreement's tenure. Comparing several industry representative agreements before signing can help representatives and suppliers ensure their ability to compete successfully.
About the Author: Glen Balzer is a management and forensic consultant involved with domestic and international marketing and sales. He advises parties involved with contracts between suppliers, global customers, manufacturers' representatives and industrial distributors. He promotes conflict resolution between parties involved in representative and distribution agreements, serving as an expert witness. He has significant experience with integration and rationalization of merged and acquired companies. For 30 years, he has been involved in all aspects of creating and managing marketing and sales organizations throughout North America, Europe and Asia.
Copyright © 2005 Glen Balzer.All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you believe you may lawfully use a quotation, excerpt or paraphrase of this article under the Fair Use exception to copyright law, except as otherwise authorized by the author of the article, you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.