How to hire a sales rep – entrepreneurship
Jeanne W. Harvey
A serious misunderstanding between a company and a sales representative can be unpleasant and expensive. A sales representative, after all, is often the key link between a company and its customers. Many a business owner has learned the hard way that it is better to spell out the terms of a sales representative’s employment at the beginning rather than when the arrangement ends or, even worse, sours.
To avoid potential pitfalls in hiring a sales rep, here are 10 things you should do when negotiating employment terms with a prospect:
1. Get it in writing. You should always enter into a written agreement at the outset of any relationship with a sales representative. Too often an informal oral arrangement is relied upon, and the relationship sours when expectations are not met. The exercise of negotiating the terms of a written agreement is invaluable in preventing misunderstandings down the road.
In addition, some states require certain types of agreements with sales representatives to be in writing. Penalties can be imposed on businesses that do not have written agreements that contain certain mandatory provisions.
2. Define the product. Attach an exhibit to your agreement listing the specific products that the representative is to promote and sell. Defining products may seem obvious if you have only one or two. If you have or if you develop additional products, however, you need to decide which sales representative will represent which products.
You may want to use a different sales representative if your business expands or changes.
3. Define the territory. Another key term that needs to be defined is the territory within which the representative can solicit orders. Such territories can be as expansive as the globe or as narrow as specified counties or cities. Again, the key is to be as specific as possible to prevent future disagreements.
4. Decide about exclusivity. You must decide if your sales representative should have the exclusive opportunity to market your product in a territory.
Generally, a supplier of a product would prefer to have a number of nonexclusive sales representatives to increase the chance of sales. Some established sales representatives, however, would only accept exclusives. They argue that they have developed contacts in the marketplace that would benefit the supplier and that they should not be undercut by other sales representatives working in the same territory.
You will have to negotiate exclusivity with each sales representative.
5. Calculate commissions. The most common source of contention between businesses and their sales representatives is commissions. It is important that you describe as specifically as possible the methods for calculating and paying commissions. There is no one correct way to calculate commissions. For example, you can base the commission on a percentage of the “net selling price.” This is often defined as the net price received by your company after certain deductions. These include shipping costs, trade and cash discounts, adjustments resulting from delivery of defective or unacceptable merchandise, refunds, returns, allowances, manufacturer-borne installation costs, and any state, federal, and local taxes that have been added.
You must also specify when the commissions are payable, such as 30 days after the date your company receives payment for the ordered products.
6. Limit the accounts. Before hiring a sales representative, you or your firm may have worked hard to get a certain account. You may want to continue soliciting orders directly from this account and not have the sales representative solicit such sales. You may also need to decide which sales representative will be credited with orders if the order is solicited in one territory, at a trade show for example, but the purchaser’s company is headquartered in another sales representative’s territory.
7. Set prices and acceptance terms. The agreement should either include a schedule of the prices of the products set by your business or refer to certain price specifications that your business will regularly provide to the sales representative. The agreement should also state that all orders solicited by the representative are subject to acceptance by your business, and that all decisions regarding credit, billings, and shipments will be made by your business.
8. Verify independent contractor status. The agreement should state that the representative is an independent contractor, operating at his or her own expense, risk, and responsibility, if that is the case, and that the representative is not your employee or partner.
If the individual is an independent contractor, you do not want to be responsible for providing employee benefits; nor do you want to be liable for making certain employee withholdings from any payments to the sales representative for state and federal taxes, disability, and Social Security, for example.
9. Set the term and termination provisions. You will need to decide the duration of the agreement. To give you the most flexibility, you should have the right to terminate the agreement for any reason at any time upon notice to the representative.
You want your relationship with the marketing representative to be mutually successful, but if for some reason either of you needs to terminate the agreement, it should say how pending commissions will be paid.
10. Develop a standard agreement. The first agreement with a sales representative that you negotiate will be the hardest. On the other hand, every agreement poses challenges because every relationship with a sales representative is unique in some way.
You can save time and money, however, by developing a standard agreement that you can discuss initially with a candidate and then complete with your attorney. Be sure to have an attorney assist you in drafting the final agreement. State laws pertaining to such arrangements vary.
If you follow the steps outlined above, you should be able to avoid many potential unpleasant surprises in your business relationships with sales representatives. Jeanne W. Harvey is a San Francisco Bay area attorney specializing in small-business law at the firm of Lewis, Knorp, Walsh & Kavalaris.
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