Establishing a Rep Firm — Start-up Costs (Part 2)

by Robert Blanding, N.E. “Mac” MacGregor and Brad Starr, CPMR

Cost Factor: Principals

Your contract with a given principal will have a great bearing on your initial cash flow. If the contract calls for a termination (longevity) clause (more and more are), then as a new representative you may not receive commissions for several months, even though you will be required to spend time and money developing the territory. Note: Most longevity clauses are awarded only when the termination is without cause, and generally the maximum length of protection is for 120 days and only for firm orders accepted at the time of termination and during the subsequent termination notice period (usually 30 days). Therefore, you must project when that first commission check will arrive.

The payment terms to which you and your principals agree will also significantly affect your initial cash flow. Most commissions are paid in the month following receipt of the customer’s payment to the principal. The promptness of payment by both the customer and the principal is vital to your survival. Be prepared to face many delays and excuses from both parties! Also be prepared for the inevitable — dishonesty and a total failure to pay in some instances. It is in your best interest to be diligent about checking a principal’s payment history with other representatives before signing on. On the up side, there are many principals who not only pay on time, but pay in the month after shipment (invoicing).

Your commission structure is another important variable in your start-up and operating costs. Two important questions are: For what will you be paid? and Will you be paid a bonus for exceeding forecast? Much time and expense can be devoted to chasing non-commissionable items such as engineering services, special products and software. Such efforts can, of course, lead to product sales and commissions, but you must count the cost before you expend valuable resources.

If a principal’s business is such that the design, purchasing and/or production functions are handled in more than one location, be sure you understand how and what you will be paid for your contribution to a sale resulting in a split commission. (Note: If principals motivate and pay their regional sales managers on the same basis as their reps, you’ll have allies in those regional managers when it comes to tracking your split commissions. If you collect, they collect!)

Whether or not you are eligible for bonuses when exceeding forecasts can also determine how and where you expend your major selling efforts. Another factor to consider is whether you will be adequately paid for what many reps often refer to as non-selling tasks, e.g., managing distributors in your territory, assuming some (or all) of a principal’s customer service function and conducting research and development activities.

The entire issue of support from your principals has a sizable impact on your bottom line as a representative. Do your principals provide good and responsive technical support ? If not, you’ll lose business, spend endless hours ($) on the phone ($) and suffer a diminished reputation with your customers and prospects. Do your principals’ technical support people have a positive attitude about supporting you? You must win their respect by showing a willingness to learn their products. Do your principals offer satisfactory product training? If not, you’ll log many hours either studying their manuals and web sites ($), on the phone with the factory ($) or losing business because you cannot help your customers solve problems.

Do your principals provide sound documentation? Or will you be digging through poorly written manuals or calling the factory to get answers to elementary questions? Note (and a caution): You owe it to your principals to tell them if this area needs improvement. However, keep in mind that some people, especially techies, dislike hearing bad news. Be diplomatic — say the nastiest things in the nicest way!

Do your principals produce quality products? Are they ISO 9000 (or later) certified? A large cost factor in any representative firm lies in the expense of chasing poor quality. How many hours will you spend winning back an unhappy customer? Remember that quality is more than just mechanical and electrical functions. It involves every aspect of a company, from correct labeling and invoicing to a product that works and works as advertised.

Do your principals operate a toll-free telephone number? Do they allow their representatives to use it? We believe that representatives should have access to toll-free calls. The toll-free lines exist to provide better customer service, and in most cases, the representative is the first line of contact with customers. Here’s another caution: Don’t insist that your customers go through you for everything. It can slow down a process, anger both your customers and principals, and needlessly burn up your time ($). Be certain, though, to “train” your principals to inform you of all activities in your territory, and do the same for them. You may be the first representative who does, and that alone will give you more of each principal’s mind share.

Do your principals allow reps access to their web sites and/or databases so you can check inventory, availability, order status and shipping information? And how state-of-the-art are those web sites? Are your principals using their web sites to full advantage to market their products and facilitate the sales process?

Do your principals make truly meaningful visits to your territory? Time and money can be consumed rapidly by the well-meaning executive or sales manager who feels compelled to make “x” number of calls in your territory, whether needed or not. A well-organized visit by a factory sales manager or executive can impress your customers with your and the principal’s interest in them, but you must plan and call the shots. If you take the initiative, you can determine the most cost-effective way to use this valuable sales tool.

There is one more principal cost factor that is less tangible than those already listed, but it can be costly. Do not overlook the impacts of the “competition” of representatives in other territories. If a principal has a high-quality representative sales force in other areas, you and your firm will be judged against a pre-determined standard. You should assume your start-up costs will be higher if you must reach that level of quality rapidly.

This article, the second 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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