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.

  1. 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)?
  2. 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.
  3. 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.
  4. 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?
  5. Do you know how to use the Internet to find, choose and book low-cost travel arrangements?
  6. Do you know how to assemble and present a genuinely professional proposal?
  7. 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?
  8. 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.
  9. 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.

  1. 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?
  2. Do you have any experience as a representative? Have you worked for someone else or must you learn on the job?
  3. Do you understand how to deal diplomatically with a principal who doesn’t support you properly?
  4. Have you participated in “fundamentals of selling” courses?
  5. Do you have relationships with customers and potential customers for your chosen area of product concentration?
  6. Do you know how to qualify a prospect? Do you understand the importance of this process?
  7. 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.

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