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President’s Message
By Mike Kowalczyk, 2005
President
This quarter’s E-newsletter
highlights a recent survey conducted by MRERF on the value of the
Certified Professional Manufacturers Representative (CPMR) designation.
If you have not already earned this certification I strongly encourage
you to learn more about it by going to www.mrerf.org.
We also
have an interesting synopsis of an article by Randall Gillary, a
recognized legal expert on sales commissions, on buy-sell agreements for
independent rep sales agencies. If you are interested in buying or
selling a rep business this article will be of great interest to you.
Finally,
we have complete details on the upcoming AIMRA / FEMA / FEWA Annual
Marketing Conference in Las Vegas, Oct. 31- Nov. 2 in Las Vegas.
I have
heard from a couple members who voiced concern about a decision of the
AIMRA Board to require a minimum two-night stay at the Mirage Hotel. I
ask for your understanding in this policy. Last year we had to pay the
Orlando Wyndham Hotel over $5,000 for unused sleeping rooms. The lodging
industry is playing hardball these days with room commitments. While we have
made every effort to negotiate the best contract possible with the
Mirage, it is critical that members attending the conference stay at the
Mirage to minimize AIMRA’s potential liability for unused rooms. If you
have any additional questions on the reason for this policy please
contact me at kowalczyk@maxxconnect.net.
The Value of the CPMR
Designation
We are proud to announce that
Marcus Kimball, CPMR, Pete Kimball & Associates, Inc., and Ted
Traeder, CPMR, Traeder Enterprises, Inc., have completed all coursework
and a final exam to earn the CPMR designation. Both Marcus and Ted will
be recognized at the AIMRA Marketing Conference in Las Vegas.
A recent survey of manufacturers
reps that have earned the Certified Professional Manufacturers Rep (CPMR)
designation produced these results on the value of the designation to
their business.
·
Two-thirds of designees said the
designation has enhanced their credibility with principals and customers.
·
92% of CPMR designees recommend
earning the designation to other independent reps.
·
Given an extensive listing of
factors that are critically important to their business today, CPMRs said
that understanding how the rep of the future will work and technology
utilization as the most important.
To
learn more about the CPMR designation go to http://www.mrerf.org.
The Relative Nature of Buy-Sell
Agreements
By Randall J. Gillary
The
Question
Occasionally
in my law practice, manufacturers’ representatives and their corporate
lawyers consult me to help them establish the value of an interest in a
manufacturers’ representative sales agency for purposes of a shareholder
buy-sell agreement or for the outright sale of the agency. A typical
reason why this would occur could be for succession planning purposes
whereby an owner of the sales agency is attempting to establish a dollar
value for the respective owners’ interests. In the event of the death of
an owner, most manufacturers’ representatives are disinclined to be in
business with their ex-partner’s surviving spouse. In other instances,
one of the owners may be considering retiring with a junior owner taking
over the agency; a father may be selling to a son; or in other instances,
one of the owners is just fed up with the sales business and wants to
retire and play golf.
Many attorneys, who are very experienced in
corporate law, have little experience with the intricacies of the
manufacturers’ representative business. The value of a manufacturers’ representative
sales agency is often dependent upon some key factors, which may not
appear obvious to the typical legal practitioner. Ascertaining an
accurate value of a manufacturers’ representative sales agency can be an
illusive endeavor.
During these consultations the corporate
lawyers often ask, “What dollar value should we use for the stock?” They
are often perplexed with my answer.
The Answer to the Question
The answer to the question, “What dollar value
should we use for the stock?” is generally that there is no answer. After
I tell the lawyer this, I then usually advise him to “Search not for the
correct answer, Grasshopper: Search for the correct question.”
The corporate lawyers generally look at me
with a vacant stare, especially the ones who are younger than 50. Once
they are able to verbalize their response it is often:
Why are you playing mind games? All you have given us is a conundrum. All we
want to know is how much Mr. X’s interest in the sales agency is worth.
Why can’t you just tell us what number to put in the buy-sell agreement
so that we can plug it into our word processor and print out a nice
contract that everyone can sign and be happy with? Why are you being so difficult?
I answer: It is not a question of being
difficult. You have come to me for an answer to a question that has no
answer. You must first ask the right question.
What is the right question,
teacher? And then I say, “ Ah, now you have finally asked the right
question.”
The Right Question(s)
Once the corporate lawyer has been able to let
go of his preconceived notion that the value of his client’s interest in
the manufacturers’ representative sales agency is a quantifiable number,
which can be calculated with mathematical certainty, we are able to make
some progress. Sometimes this is a painful process, which involves the
gnashing of teeth and blustery pontificating. Sometimes I am looked at with another
vacant stare, a polite thank-you and then a good bye. With more enlightened and open-minded
corporate lawyers who have no fear, we are able to proceed to the next
step. It is at this time that I help them to understand the process of
solving this problem for their client. It is sometimes difficult for
lawyers to be able to let go of their perceived need to know everything
and to be the providers of ultimate wisdom for their clients.
For those who are able to stay with the
process, I give them a series of steps, which must be completed before we
can proceed. This is sometimes referred to as the “Wax on - Wax off”
process. I ask the lawyer and the manufacturers’ representative to do the
following for our next meeting:
1. Produce a copy of all written agreements
with each principal of the sales agency. If there is not a written
agreement for each principal, then state the general terms and conditions
of the non-written agreement. For each of these agreements calculate the
termination value of the contract.
I am ordinarily then asked, “What does
‘termination value’ mean?” I respond that it is the anticipated
commissions, which would be paid after termination in the event that the
principal sent a termination notice today. This is a relatively easy
calculation in the event that the sales representation agreement contains
a provision for post-termination commissions. If it does not or if there
is an oral agreement, I will generally need to get more involved in this
aspect of the process.
2. Prepare a spreadsheet of all current
commissionable business. In this spreadsheet, identify each part, which is in production, and include the following information:
(a) Identify the person at the
sales agency who procured the principal for the agency.
(b) Identify the person at the
sales agency who procured the purchase order for each commissionable
part.
(c) Identify the person at the
sales agency who performed the day-to-day work with the customer. Often
the client then asks, “You mean the one who does the servicing?” I then
have to tell them without equivocation,
Servicing is a term that should be banished from your lexicon. You
do not service. You only sell. If you are paid on commission then you
only get paid if there is a sale. There is no servicing. There is only
selling.
Sometimes this causes great
perplexity. But once there is understanding of this concept, we are able
to proceed.
(d) Estimate the anticipated life of the part/program.
3.
Prepare a spreadsheet of all anticipated future commissionable
business covering approximately the next three to five years. Include the
same information as suggested in paragraph 2.
Once we have the spreadsheets completed, we
can begin to finalize the process to solve the client’s problem.
Additional Key Factors
In working through this process, there are
some additional key factors that will need to be evaluated. These
include:
1. The strength
of the relationship with each principal of the agency. For example, if
the selling owner leaves the agency, will this cause a principal to use
the occasion as an excuse to terminate the relationship?
2. The effect that the market
will have on the sales commissions that will be earned over the course of
the next three to five years.
3. The probability of the
occurrence of any significant events, which could materially affect the
sales commission flow. For example, are there any mergers, acquisitions
or joint ventures on the horizon that could either significantly increase
or significantly decrease the volume of production business and therefore
commissions? Are there new product
lines or programs in the design and engineering stage, which will be in
production shortly? Are significant programs or parts in the process of
being phased out?
Often times it is difficult to quantify the
significance of these factors. They are however, important considerations
in the overall process. It is very important for the parties to have a
clear understanding of the universe of potential future commission flow
when reaching an agreement on the sale of an interest in the
manufacturers’ representative sales agency.
By now it should become evident that there are
many problems with attempting to quantify an exact number for the
purchase price of a seller’s interest in a manufacturers’ representative
sales agency. If a quantifiable
number is used, then it can be unfair to the seller if shortly after
closing, the following occur:
1.
Sales dramatically increase due to market conditions.
2. The customer implements new
product lines or programs, which significantly increase commissionable
sales.
3.
New customers are secured through acquisition, mergers or joint ventures.
4. New principals are acquired
as a result of the prior reputation of the agency.
It
can be unfair to the purchaser if shortly after closing, the following
occur:
1.
Sales dramatically decrease due to market conditions.
2.
Product lines are lost which significantly decrease commissionable sales.
3.
Customers are lost due to mergers, acquisitions or joint ventures.
4. One or more principals use
the occasion to terminate the sales representation agreement with the
agency.
In my opinion, the best way to fairly
compensate the selling owner for his interest in the sales agency is to
create a formula for an equitable sharing of commissions for a specific
period of time. This also is generally the fairest way for the purchaser.
By using a commission sharing formula, both parties share in the risks
and benefits of significant changes in commission flow.
Another reason why a commission sharing
formula is often the best way to compensate the departing owner is the fact
that most sales agencies have few or no “hard assets”. There is usually
no significant machinery or equipment, no inventory, often no real
estate, etc. If the agency has any of these assets, then they can be
evaluated using traditional appraisal methodology. Generally the only
true asset of a sales representative agency is its commission flow.
Commission flow, as we all know, can sometimes come and go with the
wind.
If the commission flow is higher than
anticipated, the seller should get more money for his interest in the
agency. If the commission flow is less than anticipated, the seller
should get less. In most buy-sell transactions, it is the commission
flow, which funds the purchase of the agency.
If a manufacturers’ representative signs an agreement
to purchase an interest in a sales agency for a specific sum of money
which is predicated upon a specific commission flow and that commission
flow is significantly reduced, then the buyer ordinarily still has the
responsibility to pay the specific sum regardless of whether or not there
are sufficient commissions to justify the purchase price after the sale.
This is a situation that no purchasing manufacturers’ representative
should ever be in.
If a manufacturers’ representative signs an
agreement to purchase an interest in a sales agency for a specific sum of
money which is predicated upon a specific commission flow and that
commission flow is significantly increased, then the seller is ordinarily
limited to receiving only the specific sum regardless of whether or not
the commissions have significantly increased after the sale. This is a
situation, which no selling manufacturers’ representative should ever be
in.
A Suggested Formula
Below is my suggested formula for compensating
a departing owner. In the automotive industry there can be hundreds of
individual parts in production at any given time. I recommend that the
formula be utilized for each individual part. In some cases as an
alternative, the formula could be used for each individual customer or
maybe even for each principal. My suggested formula, which should be used
for each dollar of commission received, is as follows:
1.
X% (e.g., 25%) to the person who procured the principal
2.
X% (e.g., 25%) to the person who procured the customer/account
3.
X% (e.g., 25%) to the person who procured the purchase order
4.
X% (e.g., 25%) to the person who will be handling daily customer contacts
This formula should be applied to all of the
business which is in production as of the effective date of the sale or
closing for the life of the parts or for a specific agreed upon time
period. In addition, the formula should be applied to all new business
which was either quoted or for which significant work was performed,
prior to the effective date of the sale or closing. The total paid to the
selling owner by the purchaser for the life of the parts or for the
agreed upon time period is the “purchase price”.
Can There Now Be A Quantifiable Number?
Once both parties to the transaction have
gotten this far, only then will I recommend that they have a discussion
about a quantifiable number to be used in their buy-sell agreement. I
usually tell them that if they decide to use an exact number, that number
is not a number, which should be calculated by their attorney or CPA. It
should be a negotiated number agreed upon by the buyer and seller using
their knowledge of the business and the principles discussed in this
article. If the two salespeople
can sit down, use the principles in this article, and then decide upon an
exact number which they are both agreeable to, then more power to them.
Some people have difficulty with the concept of a floating purchase price
for their stock interest. As long as both parties take into consideration
all of the factors, which I have discussed, then a quantifiable number
can be a realistic option. It is usually best for the actual sales people
who are involved in the business to come up with this number and not the
“experts”. If a quantifiable number is used, both the buyer and seller
should still consider including a provision in the agreement to address
extraordinary events affecting commission flow after closing.
Conclusion.
Many manufacturers’ representatives at some
time during their career will be in the situation where it becomes
necessary for them to hire someone to ascertain the value of their
interest in a sales agency. If and
when this happens, you should try to involve an attorney who is
knowledgeable about the manufacturers’ representative business. Due to the intangible nature of the key
asset of a sales agency, i.e., commission flow, the typical paradigm for
corporate buy-sell agreements has little application. If your attorney is operating under the
presumption that it will be necessary to quantify the value of the
interest in the sales agency to be transferred, you should have a serious
discussion with him early on in the process. If your attorney refuses to
open his mind to the possibility that negotiating a quantifiable purchase
price may not be the best option, I would recommend that you hand him a
copy of this article and ask him to call me if he has any questions.
Randall J. Gillary is recognized as a top
legal expert on sales commissions. He has worked on landmark commission
cases and is an active litigator, counselor, legal writer, and
lecturer. His practice is devoted to ensuring that sales
professionals are paid the commissions they have earned. For more
information check out: www.gillarylaw.com, or call his office at: 800.801.0015.
Nominating Committee Report
Nominating Committee Chairman, Ries Morrissey,
reports that his committee is recommending Marcus Kimball, CPMR, of Pete Kimball & Associates, Inc. as
the incoming director-at-large. If elected at the annual business meeting
on Nov. 2 in Las Vegas, Marcus will serve a two-year term. Miller Hadskey
will move up from a director-at-large position to serve as Treasurer in
2006, Rob Neal will move up to Vice President and Ron Reed to President.
The Nominating Committee consisted of Ries,
Bob Gutzman, CPMR and Terry Twiestmeyer.
“Fame usually
comes to those who are thinking about something else.”
Oliver Wendell
Holmes Sr.
“Beauty
endures only for as long as it can be seen; goodness, beautiful today,
will remain so
tomorrow.”
Sappho
Do Customers Take You for Granted?
Being taken for granted pinpoints you as
average or ordinary. Settling for the ordinary limits the income you will
earn, the interest people will take in you and the amount of respect you
will get. In short, it puts you in
a box. How would you best like to be classified: remarkable, unusual or
average? Answer yes or no to the following quiz questions to help you
gain a few insights.
- Do you agree that failure is relevant? If you don’t flop from
time to time, you probably aren’t progressing.
- When you are a customer, do you challenge salespeople
reasonably but as much to the hilt as you can?
- Do you view optimum service more as reasonability than a
favor?
- Can you cite at least three acts of outstanding service you
accomplished for accounts during the past three years?
- Could you name three or more customers who would probably
switch to other suppliers if you stopped serving them?
- Are tales of outrageous customer service commonplace in your
company’s newsletter and literature?
- Do you ever spend valuable selling time on a customer’s behalf
if you see no personal-profit advantage from the effort?
- Do you spend as much social time as you can – as well as
business time – with prospects and customers?
- Do you ever do crazy things regardless of the opinions of
others?
- Do you enjoy being surprised and surprising others?
What is your total number of Yes answers? Eight or more and you
rate as a Superservice Pro.
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