Author: Tom Phillips

An interesting dilemma arose around some new sales rep commission agreements being prepared for a client. It involved long-term commission payments by the client to the reps for making introductions and perhaps helping with the initial sale. The discussion came around to when should that stream of commissions cease in case the rep’s agreement was terminated?

The instinctive response is that the payments stop when the agreement terminates. Thinking about it, though, that is not very fair.

The rep completed his/her responsibilities up front, before the customer actually became a customer. My client was willing to pay the commissions forever when the agreement was in place. Should the termination of the agreement stop the payment stream? The answer, of course, lies in why the agreement was terminated. We had to consider a wide range of possibilities:

• The client terminates for convenience
• The rep terminates for convenience
• The company breaches the agreement and fails to cure the breach
• The rep breaches the agreement, but not by doing anything that might damage the client or the customer. For example, the rep consistently fails to submit the form to “register” its prospects
• The rep breaches the agreement in a really material way, by violating the confidentiality provisions, the customer’s security regulations, or the customer’s basic rules such as the prohibitions against sexual harassment.

My client chose a very lenient approach. These particular “reps” were senior business people with valuable high-level connections, and they could help the client in many ways. Bringing in key accounts was just one of them. Also, the reps were signing up for non-compete clauses that would limit the markets they could work in for a period of time. My client was willing to give a lot to get these people on board, so its decision may not be what the reader would have done.

In the end, this particular client decided to stop the revenue stream only in the extreme case described in the last bullet. There were very few things the reps could do to breach other than those items, anyway. The big “giveaway” was in case the rep terminated for convenience, but the client was willing to work that way – the rep would still have earned the commissions and the client would continue to collect the revenue.

Comments are welcome.

The creation of agreement templates is one of the more difficult tasks for any company. The problem is that many small- to medium-sized companies fail to recognize the inherent problems.

The easiest way for a company to get a template is to use one that some executive brought over from a previous life (metaphorically). That document may be unsuitable for many reasons:

• It came from a company with a different business model, so how can it fit the current company’s practices? I have seen companies try to convert a sales agreement to a service agreement, with predictable outcomes.
• That re-used agreement is the end point of a previous negotiation. Key provisions may have been conceded in the initial negotiation for something of value, or because the point just could not be won. Using the template now as a starting point means that those concessions have already been surrendered without receiving anything in return. That violates one of the prime rules of negotiation.
• Key people may not have been included in the process of preparing the template. Perhaps protection of intellectual property was not a problem at the old company but is at the new one. The old template is often used without consulting people in development, maintenance, finance or engineering to determine what new provisions or major changes are required.

Starting your draft with an old agreement template is sometimes a good way to save money and speed the process. It is a pitfall if the adopter does not understand the issues involved and how to modify the agreement appropriately.

10 tips on negotiating a basic sales contract from the seller’s viewpoint are provided below. The information is written for the seller, but the buyer can easily extrapolate useful information. Some of this material is covered in more detail in the whitepaper “Small Company Don’t Sign That Contract Yet: 5 Tips for Dealing With a Larger Company.” Download a free copy of the whitepaper here.

In regards to the simple sales contract:

1. Make sure you are negotiating with the person that holds the checkbook. The author once worked for a company that thought it had wrapped up a sale to Cisco Systems. The company not only bent over backwards to fulfill Cisco’s technical requirements, but negotiation had begun on the sales agreement for the first few copies of the software. Then it was discovered that the people with whom we had been dealing had no real say in the matter – another manager made the buying decisions. She said ”no.” As a result:
   • The company suffered from the internal cost of the lost hours in the sales effort
   • The specialized development became a sunk cost; and
   • The whole company suffered because management’s attention had been distracted from the core business.
2. Be certain that a basic sales contract is what is really needed. If there are going to be many sales orders with lengthy discussions on each and significant variations in terms, a Master Sales Agreement might be appropriate. A Master Sales Agreement defines the basic commercial terms and conditions, but it cover more ground and also sets up the mechanisms for changing the Ts and Cs.
3. Have a purchase order process. That means stating what must be on a purchase order to make it valid. Include a purchase order acceptance as a requirement if you are dealing with something that takes you time to produce. You do not want to be working at maximum capacity on an order for five hundred units and be hit with an immediate order for a thousand; you wish you could take the order, but might not be able to do so without a large capital investment.
4. Be sure to cover when ownership of title and risk of loss transfer to the buyer. Allow some leeway for the buyer to specify shipping agent, etc., but be sure title is transferred only when payment is received.
5. Be sure the terms and conditions of the sales agreement specifically overrule the buyer’s purchase order. Purchase orders have two sides, and one of them has onerous terms and conditions to which you do not want to agree. The author once led an acquisition due diligence team that discovered the targeted software company sold on other company’s purchase orders alone. The verbiage on the back of one or more of those purchase orders placed the software in the public domain, making the company worthless.
6. Do not forget training. If you sell some very common widget or a service, this does not apply. If you sell software or equipment, be sure that you offer a given number of training seats per unit sold, and anything else is extra, as is training at the buyer’s facility.
7. Refer to the written maintenance policy in the sales contract. If you do not have one, create it. It is far better to have established answers concerning 24/7 support, levels of problems or errors and the affiliated response time, etc. Use the maintenance policy to make maintenance a profit center.
8. Include a warranty period that is appropriate for your product and industry, unless you subsume it in the maintenance agreement. The warranty period is how long you will make needed repairs for free.
9. If you are dealing with software, be sure you include the software license, effective only upon full payment being received. Make sure important issues like the right to sub-license are covered.
10. As with any contract, even the simple sales agreement should have a term and termination section; at some point the deal will need to be re-worked.

A free outline is available that lists all of the points to be covered in an OEM Agreement. The outline would be useful for a sales agreement as well, though it covers some superfluous areas. The outline may be downloaded here.

There are organizations that teach nothing but negotiation skills. You are urged to take advantage of what they offer. This post should help you better negotiate in some cases, but it should also cause you to consider formal training in negotiation. Such courses will provide much more insight into the kind of role to adopt, reading cues from the other side, etc.

Prepare for the Negotiation

An attorney once paid the author what he considered a very high compliment,”he is always prepared for every negotiation.” He was referring to the following effective contract negotiation tips:

1. Read the contract a number of times until you are very comfortable with it.
2. Analyze the sections so your are sure of their meanings. Do not forget the definitions.
3. Look for and understand the relationship between key sections, such as indemnifications and limitations on liability.
4. Consult with the right people – not just management and other team members, but also subject matter experts that will have to make the contractual relationship work from day-to-day.
5. Develop a written negotiation plan, usually a mark-up, but with copious marginal notes on:
   • What concessions should be made for what changes to the terms
   • When those concessions should be made in the negotiation

Have the Right Negotiating Team

1. Effective Agreements advocates a three member team other than the attorneys. The team members should be:
2. One person who is the main negotiator and the only one who speaks officially for the team. Everyone else should feed information to the negotiator by note, during caucuses, etc;
3. One person who only takes notes so that, at the end of the day, the team knows the status of
   every issue;
4. Perhaps the most important member: the one who remains silent and takes no notes, but is free to listen to everything that is said. This is a very powerful technique. This person has time to:
   • Listen to everything that is said by personnel on the other side, even if they are not active in the negotiation;
   • Think through what he or she has heard in relation to the negotiating plan;
   • Call for breaks and fill in the negotiator on what he/she has heard and his/her analysis of the current situation. Remember, the prime negotiator must be thinking about what to say to the other team next; this person does not.

The above structure may not be optimal in every case, depending on such variables as the size of the other team, managements wish to be involved, and items requiring subject matter experts, such as highly technical issues.

Behave

1. Do not get emotional and raise your voice, unless you have decided in advance to do so (hey, sometimes it works;)
2. Never, ever correct something one of your team member says in front of the other team with the possible exception of correcting a technological error;
3. Do not talk if that is not your role.

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1. Some portion of the information in this post comes from the Karrass books and other materials. Providing a footnote for every point would be incredibly time consuming, as the author does not remember where every idea came from. Hopefully the Karrass organization will consider this adequate attribution.