Manufacturer’s Representation:

A quick glimpse into mistakes and fortunes

TASA ID: 4718

I have been in this business for 40 years and, I have seen just about everything.  This year is my retirement.  While it has been a rewarding livelihood, at times it has been scary as hell.  Being a manufacturer’s representative is being the “man in the middle.” Controlled/manipulated/slaughtered by the Manufacturer’s (principals) who pay me and the buyers who I sell to, I have been straddling the fence for my entire career.    While I have been phasing out for the last three years, I now face the reality of walking away.  Golf has been my recreational passion.  Whenever I needed a break, I spent it playing golf.  Now, I need a break from golf, so I need to spend more time consulting.  Ironic!  

Two years ago, I was contacted by a Memphis lawyer (not John Grisham) asking if I would help him with a case.  He represented a manufacturer’s representative who had tirelessly worked for two years to place a Canadian company’s product into Walmart only to be fired shortly thereafter.  Not surprisingly, he was never paid a commission.  It was one of several similar stories my profession encounters.  This particular issue was fraught with twists, turns, deaths and intrigue.    I loved the cerebral nature of the challenge and knew I could help as an expert witness.  It was hard work and fun.  I spent more than 80 hours on this case; giving advice, writing reports and opinions and testifying in Memphis Federal Court.  In addition to the considerable knowledge I had about my profession and the “mine fields,” many of us had experienced, I gained valuable insight into how I could help a legal strategy.  So, I am sharing some of my experiences and background.

I have represented small companies with brands that few people ever heard of, as well as some of the most recognizable consumer brands in the industry including Weber-Stephen BBQ, Cuisinart, Conair, Bissell, Clairol, Remington, Sunbeam-Oster, Georgia Pacific, Schick….to name a few.    And, I have sold to small “Mom & Pop” stores as well as the very largest….Walmart, Sam’s Club and Costco.  These large ones survived and now consist of all my business.  

While my experience is with the Retail industry, the template for the “rep” business remains pretty much the same.  Relationships and reputations establish and grow the business.  A solid business model keeps it profitable.  Contracts can be as simple as a handshake, one paragraph or multi-page “boiler plate” versions.  Sales negotiations, purchase orders, shipments, returns, etc., all affect your earnings.  Understanding and managing them can determine your profit, loss or…..survival.  Commissions and/or retainers must be carefully negotiated, contracted for and their payments must be closely monitored.  Rep Partnerships can either be a boon or a minefield…they can build and destroy the business in short order.  How do you sell your rep company?  Or, how do you buy a rep company?  When does litigation makes sense…when it does not. And, then there are “conflicts of interest,” or, as some reps call them, “compliments of interest.”   We were really good at this.   Some thoughts on everything…

The business...I have worked with large companies…Walmart, Sam’s Club and Costco as well as the smallest.  My company covered six states in the Midwest and we had just about every kind of retailer imaginable ranging from a one-store operation to regional chains to the “gorilla-in-the-room,” Walmart.  The Walmart “train” grew quickly and overran our territory. We watched it day-by-day. Along the way they drove most of our customers out of business.  So, we re-focused our business to include Walmart and then Sam’s Club and Costco.  We prospered!  Along the way we got really smart.  

Whether it is the retail business like mine or the widget business, the framework for managing your business through this profession’s mine fields are basically the same.  In the rep business, your main assets are your principals, your customers (buyers) and your reputation (and that of your salesmen).  All three are needed to make it happen.  And, if any one of the three breaks down, you are history.  You have nothing else to fall back on.  So, each must be protected and safeguarded.  Theoretically, you and your principals are protected by your contracts (ha!).  Customer relationships are protected by the reputation you have created by attending to your “successful” servicing and selling.  Reputations, in turn, are protected by both your customers and principals.  This “circle of success” needs to be cultivated and treasured.  It is “fence-sitting” and business building at its best.

The business model … rep companies range from one-man shops to multi-rep and multi-location businesses.  Some operate in a specific territory.  Some specialize within a narrow trade, product or service group or, in my case, specific retailers.  We grew from a one-man operation to several salesmen in multi-locations covering the six states.  There were issues along the way but the template was clear from the beginning…we would try to operate the same way as a large company.  Every rep was paid a draw based upon a percentage of the commissions they earned.  The overage/bonus earned was paid quarterly.  The company paid for their office, travel expenses, health insurance, and a portion of their 401K Plan.  Each office had assistants and/or customer service personnel.  We established an earnings program that provided for one to survive and flourish if they worked hard.  This was borne out of watching other rep companies flounder and go out of business because of poor financial management.  Most rep companies’ incomes rise and fall through the year.  Regardless of the specialty, there is a seasonality that must be planned for.  There are no fixed assets to rely on for easy borrowing.  Should you have a credit line at the bank, you sleep on it.  If people don’t get paid, there is no excuse.  This will cause dissension and break apart an otherwise successful company.  We are proud to say that in forty years, we never missed a twice-monthly pay period. 

Partnerships…are as common in rep companies as partnerships in law firms.  I have purchased four rep companies and sold two.  The rep companies that I purchased all came to me…a testament of our reputation.  In two cases, they were retiring and wanted to “merge” for a retirement income.  In another, they got into financial trouble and needed a bailout so we “merged.”  In the fourth case, their partnership dissolved and a merger with us was the safest way to save a job.  In each case we retained the principals.  Two of these principals are among our largest.  It is not easy to make this work with all parties.  It requires careful negotiation and fully committed involvement by everyone.

I decided to sell the business in 2004 which I founded back in 1979 to my three junior partners.  By this time, there were two distinct businesses, the non-Walmart portion which consisted of the five states, three offices and personnel.  I am proud to say that my partners have continued where I left off…this business is still the dominant retail rep company in the Midwest.  As part of the sale, I spun off the other part of the business, Walmart, Sam’s Club and Costco portion to a new company that I established in Bentonville, AR.  I am now retiring from Retail Works, LLC and the team in Bentonville, AR will take over.
Partnerships also happen because reps in regional cities find it better for their business to merge.  Or, they have other common reasons, specialties or relationships for partnering up.  However they meet and merge, most significant rep companies have partners.  Somewhere along the line, ego rears its head.  These are salesmen.  They are inherently competitive…thus a pecking order must be formed and agreed upon, or a breakup happens.  A smart rep understands this possibility and protects themselves with a clear management structure and non-compete agreements.   Every one of our salesmen had one.  Fortunately, we positioned these agreements (correctly or incorrectly) as “air-tight.” We had key salespeople leave over the years and rarely lost principals to them…none that we wanted to lose.

Contracts…Often, reps are so eager to sign up a new client/principal that the contracts they agree to are one-sided…favoring the principal.  I am totally guilty of this.  Rarely, have I insisted upon changes that were actually made.  The reasons are two-fold…eager to win over a new client, particularly one with a built-in income, and “assumed” industry standards.  It’s just the way it has been done.  Once I asked my lawyer to look at a contract.  He came up with several revisions, all of which were discarded by the principal.  I signed anyhow.  I got lucky…25 years of consistent income.

One of my most successful contracts was a simple handshake.  And, this was with a Chinese manufacturer who I was told was highly reliable.  I asked for a finders-fee should he be awarded the manufacturing business of a principal that I introduced him to.  He got the business and 30 days later I started getting paid.  We eventually became very good friends and it was a very profitable relationship for both of us.   It remained a “handshake” contract.  For more than 10 years, he wired money into my company’s bank account every month until my principal was sold and the manufacturing moved on.

Another contract was to buy a retiring rep’s business.  It was something we really wanted as it filled gaps and would catapult us into nearly doubling our business, overnight.  It was a perfect contract…until our final meeting which was to be the signing.  The owner decided to demand that his son be placed upon equal terms with our partners.  This had never been discussed.  His son was new to the business and had a troubled past.  Needless to say, we ran, not walked, away.  Best decision we never made!  Things did not go well for them and they never got what they wanted.

Years ago I looked at my company’s largest principals’contracts.  Five of them were on one page…and, these are large companies.  We asked for and got more formalized contracts which are now the norm.  The one thing I learned about contracts is that they are not worth anything unless you get paid.  Provided you earned it, a consistent monthly check can quickly make you forget the contract details.  When needed, they can save your butt.  Paying attention to the details is critical.  We are more interested in understanding each principal’s contract so we would know when, and if, we should act.  There are “tricks-of-the-trade” that reps can use to protect themselves…when the time is right.     

Commissions and/or Retainer Fees…the rewards of winning the sale are the commissions.  The most important thing about the commission, other than getting paid what you are due, is the consistency of payment.  Cash flow is king!  You need to expect to receive commissions the same time every month.  Many reps are paid with a combination of fees and/or bonuses.  We have converted most of our principals to this structure.  While not workable for all cases, it can help both parties with cash flow and financial management.

No rep wants a surprise after the sale that his commission is less than what he was told, or nothing at all.  These are fighting words and should be contested in the most aggressive way.  Fortunately, with good legal advice, we have success with this.  We renegotiate well but you need to know when to act, and when to not.  

In one case, with a small manufacturing company, they were somewhat successful with Walmart, but they could not get an appointment with Sam’s Club.  We had the needed relationship at Sam’s Club and quickly got them into the right buyers.  It took about 18 months to secure a sale, then another and then another.  Soon our Sam’s Club business was more than their Walmart business and 25% of their total company sales…and, growing.  Our commission grew to a point that it was more than the owners paid themselves.  This lasted about a year (longer than I thought it would).  It was inevitable, they finally asked for a reduction in the commission.  We were ready and agreed provided they give us an extension to our contract.   A year later, we did the same thing over again.  And, the following year, once again.   Now, everybody is happy.  If our relationship ends, we get paid commissions for a year after termination. 

Getting fired…sounds scary, and it is.   Any day you can wake up to a firing.  It can be a registered letter that you must sign for, a phone call or, in these times, a text or email.  Later, when you think back on the firing, don’t be surprised if you finally admit that you saw it coming.  It happens to the best of reps and once it happens, there is almost nothing you can do about it…unless, you are owed commissions.   This means, be sure you are protected by your contract.  While the company I founded continues to be one of the most reputable in our field, we have occasionally been fired.  I would like to think that none of the firings were due to poor performance.  Rather, for reasons we had little control.  Fortunately, we were well protected and have an excellent history of receiving commissions due us.  

“Legitimate” firings can happen for a number of reasons.  One of the most common is your principal getting sold.  Often it is a surprise and hard to plan for.  But, almost always should result in you getting paid.  Because we represent several companies within the same industry, we had one of our principals get sold to another.  A few years later, the combined companies got sold to yet another of our principals.  Unusual, but in a four year period, three of our principals were consolidated into one...today, it’s our largest principal.  

Bankruptcies can happen but you should see this coming.  Once we did not andI found out by reading the Wall Street Journal that the owners of the company were indicted for hiding money and fraudulent loan practices.  The next day, the Feds took control of the company and we lost lots of Commissions from sales to Walmart de Mexico.  It was our biggest commission loss.  Converting the sales force from manufacturer representatives to a company salesforce is the most common reason we have lost principals.  One could say that this is the result of you being so successful that you built the business to the level to sustain a full time salesforce.  Partially true.  In reality, this is almost always the result of long time planning with the principal and is done nationwide.  Some companies think that they lose control of the sales force with reps so they want their own.  While it may make sense with the very largest of companies, every industry and situation is different.  There are just as many companies “retiring” their salesforces in favor of reps as the opposite.

The most frustrating firing is where a new sales manager wants “his guy.” Sometimes “his guy” is his brother-in-law who decides that he can go into the rep business with the income you have built up.  Ugh!   I’ve fought this…won the battle, lost the war.  

With all the negatives, I have built the business to rely on strong, long time relationships.  Today, we are still representing our major principal since 1982!  Another, for the last 25 years.  And, most others for 15 years or more.  Can’t say this enough…everything boils down to relationships, a good business model and the right legal advice, when you need it.  Any questions, comments, etc. please feel free to contact me, TASA ID#: 4718.

TASA Article Disclaimer

This article discusses issues of general interest and does not give any specific legal or business advice pertaining to any specific circumstances.  Before acting upon any of its information, you should obtain appropriate advice from a lawyer or other qualified professional.

This article may not be duplicated, altered, distributed, saved, incorporated into another document or website, or otherwise modified without the permission of TASA and the author (TASA ID #: 4718). Contact marketing@tasanet.com for any questions.

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