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January 2003
Establishing a Rep Firm — Start-up Costs
Part 1
by Robert Blanding, N.E. “Mac” MacGregor and Brad Starr, CPMR
So you want to unleash the entrepreneur lurking inside you and start a representative business? Have you thought it through thoroughly? Do you have a plan? Have you considered all the costs and therefore
the risks? Before any good builder begins a project, he first lays out a plan and counts the costs lest he run out of money and/or materials and look like a fool. So too does a wise entrepreneur lay out a plan and
count the costs before launching a new venture.
What are the cost factors and actual cost items involved in establishing a representative firm? The answers to that question are very complex, but this series attempts to outline those costs and remove
some of the guesswork surrounding the cost factors related to a firm’s start-up.
Any financial plan must be designed with the costs appropriate for the city, state and/or region where your company is located and the availability of facilities, services and personnel. There are many
variables and intangibles. We have attempted to list those factors that should be considered as you plan and implement your new venture.
Cost Factor: Levels of Experience
The costs associated with one’s experience or lack thereof seem obvious, but they defy quantification. The costs of learning on the job vary as much as individual intelligence levels and desire to succeed.
Of course, tangible costs can be determined for classes taken, seminars/conferences attended and many forms of continuing education (e.g., to learn new management techniques, improve sales skills, make contact and
network with fellow reps, receive training on new software, etc.), but don’t overlook the cost of the time involved.
A representative firm owner needs management (administrative and organizational) know-how as well as sales skills. Possible start-up costs can be estimated via a series of questions about each category of
knowledge and experience. First, ask yourself these questions about your administrative and organizational skills.
- Do you know how to organize your time when you have 30 balls in the air at once (unlike engineering or other fields where you can concentrate on just one or two projects)?
- How good are your time management skills? There may be a cost factor associated with purchasing learning materials or attending a seminar on this vital topic. More money is wasted due to poor time management
than any other cost factor.
- Are you proficient in the use of computer software to produce spreadsheets, basic communication (letters, quotes, etc.) and electronic communication? Do you know how to use sales automation (including
opportunity tracking) software and a presentation program? If not, you will need to hire that expertise or spend time and dollars to acquire the needed skills.
- Do you understand the administrative and accounting aspects of the business? Will you need to attend classes on management and finance? Will you need to hire an office manager with these skills?
- Do you know how to use the Internet to find, choose and book low-cost travel arrangements?
- Do you know how to assemble and present a genuinely professional proposal?
- If you will not have a secretary or assistant immediately, or ever, can you perform basic office tasks? Can you organize your office to operate effectively and efficiently?
- How experienced are you at negotiating contracts, both with customers and principals? This activity will have a tremendous financial impact, both initially and throughout your “life” as a representative.
- Have you ever had experience managing people? You may incur the costs associated with attending training classes. Keep in mind that many representatives fall short in this area, but in most cases it is because
they give greater priority to other aspects (pressures) of the business.
These questions pertain to your sales skills and experience.
- Are you a “techie” (engineer) turned salesperson? If so, have you had frequent contact with customers, or will this be an entirely new experience to you?
- Do you have any experience as a representative? Have you worked for someone else or must you learn on the job?
- Do you understand how to deal diplomatically with a principal who doesn’t support you properly?
- Have you participated in “fundamentals of selling” courses?
- Do you have relationships with customers and potential customers for your chosen area of product concentration?
- Do you know how to qualify a prospect? Do you understand the importance of this process?
- How good are your presentation skills?
The answers to these questions significantly affect the costs to establish and operate a representative firm.
Your product and industry experience is another key factor. Do you know the products you are proposing to sell? Or will you incur the costs involved in traveling to the principals’ locations to gain your
start-up knowledge? (You should assume that once your firm is up and running, regular visits to principals’ facilities will be an ongoing expense. Even though some manufacturers are conducting “virtual” meetings,
you should assume that an annual factory visit is a wise move. Do you know the needs of the customers in your chosen industry well enough to help them? Do you know on whom to call (e.g., engineering personnel,
executives, purchasing agents)? Remember that there are tremendous costs associated with false starts or calling on non-decision-makers.
Cost Factor: Customers
The variety and scope of your targeted customer base, your knowledge of individual customers and their knowledge of you can all have a significant influence on your start-up expenses. How well do you know
the industry in which you want to sell? What is the current economic status of your industry in your territory? Is the future outlook positive? What types of customers do you intend to call on? Are those companies
moving in or out of your territory? Are they expanding or downsizing? Are they merging, being acquired or shopping for their own acquisitions? Don’t shy away from taking a good hard look at your targeted customer
base and territory. You may identify facts and trends that cause you to change or fine-tune your customer focus. At the very least, you will be better-prepared to serve your customer base because you will know more
about it.
In your chosen industry, is your territory more heavily weighted with one type of customer than others? If so, how will that affect your sales strategies — and your income stream? For example, if you are
selling electronic components and your territory is a high-technology design center where very little production actually occurs, you are going to spend a great deal of time tracking your designs through production.
Without evidence that your design is actually being used by the customer, you will not be paid your commission.
Do you already have established relationships with at least some of your targeted customers? If not, you’re probably going to invest a lot more time to become known to customers and to land a first sale.
Do you have a solid grasp of the needs and issues of your individual customers? (And do you know how to tap your relationship with existing customers to find new lines?) In addition to your personal contacts at
customers, do you visit their web sites and/or read their literature and annual reports? You can’t sell solutions if you do not understand your customers’ problems and plans. And you can’t sell prospective
principals on your value as a rep if you do not have in-depth knowledge of your (their) customers.
The previous article, the first of a four-part series, is reprinted from the MANA/MRERF (Manufacturers’ Representatives Educational Research Foundation) Operations Manual for Manufacturers’
Representative Firms, which will be made available for purchase on CD-ROM in spring 2003.
An Agency Opens The Door, And Then What?
Over the course of several recent interviews with MANA members, a number of challenges have been identified that nascent reps have to be aware of. In addition to increasing their awareness, however, it’s
incumbent upon these reps to possess the wherewithal to overcome these challenges if they want to reach future goals.
Here’s a sampling of some of the factors that reps must consider as they adjust to their independent rep status.
Business Sense
Most independent manufacturers’ representatives can boast of fairly successful careers in sales. After all that’s where they gained the experience and the accompanying confidence they needed to go off on
their own. But it won’t take long for the rep to realize there’s more to this game than just calling on customers.
An important ingredient to add to the mix is the need to become a complete businessperson. What does that mean? In part, the rep must know what it takes to run a small business. In addition, however, he
had better be aware of the existence and implication of various federal and state regulations under which the agency will be operating. The rep must also possess the skills needed to manage a business — even if it
is a single-person operation. In short, the rep should take it for granted that he’s going to need to be a “jackofalltrades” and master of many at the same time.
Business Sense Coupled with Financial Sense
Too often the beginning rep has an unrealistic — or more properly an untested — sense of what it takes to initiate an agency when it comes to the needed financial investment. A business plan can go a long
way toward providing the rep with the guidance he needs to steer a prudent course as he experiences hopedfor growth.
Serving More than One Master
It won’t take long for the rep to gain an understanding that his principals and his customers carry equal weight. Add to the business mix the fact that the rep has got to keep himself professionally and
financially satisfied at the same time he’s satisfying his manufacturer and customer constituents. For instance, consider the level of communications required with some manufacturers that only want to be contacted
when there’s news of a big order. Contrast that with the manufacturer that wants regular communication concerning just about all of the rep’s activities. At the same time, reps today are finding customers are no
longer as available to them as they were in the past. The pressure on customers has resulted in many of them relying on their voice and email for contact. Add to that the fact many of them simply aren’t as available
for entertainment as they might have been in the past. As a result, it’s up to the rep to determine the best methods and the level of communications to keep in touch with his principals and customers.
Time Management
For many, the opening of the agency’s doors represents the first time an individual is completely in charge of how he spends his time. How does the rep get everything done that has to be done while still
maximizing his selling time in front of the customer? Who provides the legal, accounting and technology services that he’ll need to keep his business running? Unless the new rep can allocate his time properly,
there’s the danger he’ll be distracted with tasks that keep him from achieving his major goals.
Adding Lines
The majority of the reps we contacted for this article hit the ground running when they opened their agency doors. A good number of them came from marketing or sales departments with major manufacturers.
For one reason or another, manufacturers decided to downsize or sharply cut their outside sales force. After talking with their former employers, many of these reps found themselves well armed with their first line.
This worked well for them because they knew the product, the manufacturer and the culture of the manufacturer. As a result, they could represent the company well in the field. But then the question arises “How do I
get additional lines that complement what I’m already doing?” Many have found the answer to that question to be a major concern. Regularly employed by reps are the tools of word of mouth, networking, asking
customers if they know of available lines, using the MANA Online Directory in reverse and advertising in Agency Sales. Some approaches work well, some don’t, but the rep doesn’t rest easy until he’s reached a
“comfortable” level of lines to represent. We emphasize the word comfortable here because if there are too few lines, compensation won’t be at a level to provide the income the rep is looking for. If there are too
many lines, the rep will hardly provide the service the manufacturer will require if his line sits at the bottom of the rep’s line card.
Compensation
Several reps have recently voiced the opinion that if reps were known at one time as “five percenters,” then those days are long gone. Changes in the business environment have caused the rep — especially
the beginning rep — to become more creative and more demanding when it comes to compensation. The rep’s main concern is that he be paid for the work he performs. If that work takes the form of functions other than
simply order taking, so be it, but from day one, this is something that should be negotiated with the principals. If it is not, then resentment grows as the rep finds himself required to perform more and varied
tasks and he’s only paid when the order comes through. What we’re talking about here is agreed-upon payment for “pioneering” work, marketing and consulting services, etc. Keep in mind the axiom “the rep isn’t worth
what he’s paid, he’s worth what he negotiated.”
Advertising/Marketing/Branding
How does the new rep get out word of his agency to principals and customers? The reps we spoke to for this article advertise in Agency Sales as well as belonging to and attending the meetings of a variety of business associations and organizations. In addition, they depend upon wordofmouth, and they network with and explore business opportunities through business acquaintances developed over the years. And cold calls remain a staple of their business activity.
All of these efforts, however, should be geared to creating the agency image or brand in the mind of both manufacturers and customers. Whenever either of these constituencies thinks of a product or
service, it should be the goal of the rep to have established his or her agency name in the minds of potential principals/customers.
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