Sales Agreements for Independent Sales Representatives and Medical Product Distributors
When preparing a sales agreement for Independent sales reps and medical product distributors, it is important to understand the needs and expectations of all parties relative to the terms placed in any sales or distribution agreement.
There are many variances of clauses found in sales agreements, and the specifics of the clauses may be dependent on the needs of the parties involved. There are companies utilizing many pages of terms to their sales agreements, and some companies who simply prefer shorter agreements where the inclusion of all of the provisions that could be included in a written agreement are not utilized.
All parties should carefully consider the needs of the other, resulting in a mutually satisfying agreement.
MedCepts is typically positioned as the liaison for Medical Product Suppliers and Medical Sales Partners and understanding the thoughts (or concerns) of the individual parties can be important when coming to a mutually satisfying sales agreement. As an example of differences between the vendor and the rep – the independent rep or distributor, may want exclusivity in a territory, while the vendor company may want sales closed and may need more than one rep in a territory or simply need to replace a rep already acquired. However, when a successful distributor is involved, historical sales, stocking capabilities and other entities may be a strong consideration for negotiating an agreement.
When preparing for discussions with your company’s legal adviser, consider below some of the common clauses found in independent sales agreements:
Term: The term can be made subject to an option to extend the agreement and this option can be exercisable by the company or the rep. The terms would be set forth as well as including the conditions if such options arise and how it is to be exercised. Terms may be simply provisions that give the parties the choice to extend the agreement or not. These provisions may have implications for other provisions, including but not limited to, those relating to commission and other forms of payment.
Services: Describes the services the Independent Contractor and/or medical product distributor will perform. May also include the specific products covered.
Territory: This can be defined in a geographical manner, such as by area, state, zip code, area code, county or it can be defined by a market segment, or even by a listing of specific customers or call points that the rep is engaged to service. e.g. Hospitals over 150 beds or specific hospitals, Primary Care Physicians and/or other specific specialties, Surgery Centers, Veterinarians, Pharmacies (closed, independent, chains), specific hospital departments: BioMed, Operating Room, or maybe all-inclusive to the specific geographic territory. Protecting a territory for the sales partner, independent rep or distributor, is often preferred by the sales partner, while non-exclusive territories are often offered by the Company. One of the major complaints of sales representatives involves territory issues; whereas, the company has divided their territory leaving them less territory coverage while providing more intense coverage for deeper market penetration in their now smaller territory. Companies offering territories often prefer not to provide exclusive territories until sales are received, quotas are met, and sometimes only with direct purchases. Exclusivity to the sales representatives when a facility or healthcare provider makes a purchase can be offered for that facility for a select period of time, as long as they are continuing to build sales from that facility. There are two sides to consider – the rep wants to be able to build the territory. The vendor or manufacturer wants sales and they simply can’t know what to expect from any given sales professional. They have to consider the 80/20 rule. Most sales professionals will not even request exclusivity until they have proven themselves or unless they offer up something. Some companies have requested a dollar amount for exclusivity. Now, why would the rep pay for that if he or she did not know what results they would get from the product or service offering? Working together to build synergy and a comfortable relationship takes some time. The bottom line is primarily about results for both parties. Explore together and build that relationship before diving too deep into a major commitment.
Compensation in the sales representative’s agreement is very important to the sales rep
Compensation: Commissions Compensating Independent Sales Representatives should be clearly defined including covering issues as to when the commissions will accrue, whether the commissions will be paid on sales made only during the term of the agreement with the sales rep or if the commissions will be paid on sales throughout the lifetime of the account the rep has established. There should also be provisions for considerations dealing with returns of products, credits, uncollected funds, product recalls, termination of the sales agreement, and the like. If you are considering any provisions dealing with the payment or reimbursement of expenses to the rep, you may want to specify what expenses are not payable or reimbursable by the company and exactly what are.
Depending on the relative bargaining position of the parties, payment to the rep can be more extensive than mere percentages of sales. Bonuses, as in the way of additional dollar amounts, or elevated commission percentages, may be offered with sales results as established and needs to be clearly outlined. Top Reps make seek to obtain payment based on the increase in value of the company as a result of the activities of the rep. This might be especially significant if the company is a start-up or relatively new to the marketplace or may simply be a “bargaining chip” to provide additional benefits for increasing loyalty and dedication to the company. Commission Structure Variables can be implemented to provide creative compensation packages based on mutual needs of the company and sales professional aligned.
Sales Quotas: Be reasonable, while being careful not to limit your options and sales potential! Oftentimes, companies expect and place enormously unreasonable sales quotas without research or historical sales results to support the same. Reps may see through this immediately. Sales quotas are often considered by the Company to be “The Perfect Out” for the company. Often reps may want to speak with other independent sales representatives to determine the sales potential. MedCepts oftentimes includes this in our process as we anticipate this need by the professional independent sales reps. Our involvement decreases the need for 100 newly acquired reps across the nation calling on your top sales associates, allowing those that may be involved to stay focused on more sales!
Independent contractor (ISR): Independent Contractor (Self-Employed) or Employee? Clarifies the contractor’s status as independent, and not an employee of the company – reaffirming that an employer/employee relationship is not being created. Companies should check with applicable state and federal laws regarding taxes, workman’s compensation and other laws in this regard. Note: Ownership of work product of the rep. Issues may abound about the ownership of the rep’s work product especially if the work product involves creating materials that may have protection under copyright, trademark or other laws. This includes writings, graphics, advertising materials and the like. Check with your state laws in addition to the impact federal legislation may have. Independent contractors are treated very differently than employees. Independent vs. employee: Often an agreement will spell out the agreement is for an independent contractor, reflecting the contractor is responsible to pay all applicable taxes arising from payments made to them by the Company, including, but not limited to, social security, self-employment taxes and disability insurance. We have seen agreements include specifics regarding no entitlement to participate in any Company arrangements, plans or distributions pertaining to pension, stock, profit sharing or similar benefits. Check with your legal advisor to determine the specifics you will need.
Termination: Describes the terms upon which the agreement may be terminated. Both parties may wish to have an easy-out clause relative to termination of the agreement. However, oftentimes, the Company seeks the easy out clause, whereas the sales rep seeks some sort of protection for their sales closed and sales efforts put forth for closings pending. Clearly define the termination clause and commission compensation relative to same. Check with your legal advisor for options relative to this. Remember your legal advisor is there to protect you, but consider the protection the rep may need as MedCepts also recommends reps seek legal advice prior to executing any agreement. The goal is for a mutual agreement, with fairness and protection for both parties. As an example, if the company is offering “Residual Income on established accounts” but adds a 30 day termination clause to the agreement, does the agreement provide protection for those accounts already established by the rep?
Exclusive or non-exclusive: This could refer to territory and/or sales exclusivity. The agreement would address whether the rep is exclusive to the company (as similar to a Non-Compete*: meaning that the rep cannot handle other competitive products) or whether the company is exclusive to the rep (meaning that the company can or cannot engage the services of other reps within the territory as defined). If the company is exclusive to the rep, the agreement should contain some form of non-circumvent provisions protecting the rep against the company or other reps going to the customers directly or otherwise interfering with whatever rights the rep is granted, territorially and otherwise, and thereby depriving the rep of commissions. The company would also want to consider the sales potential and other terms of the agreement. What if the sales are not as expected and the company has provided exclusivity to that rep? What if the rep has dedicated an enormous amount of time and provides sales results they’re expecting commissions from and the company wishes to share the workload with additional reps? (Resulting in commission losses as provided to the new reps) *Note: The laws around the country vary as to the validity and enforceability of provisions of Non-Competes. The reader is strongly cautioned to consult an attorney experienced in these matters in the reader’s state since the law varies from state to state. Oftentimes, a Company will present that their product has no real competition while presenting an agreement with a Non-Compete clause. The reps may view this as, if there are no competitive products why include such a clause? While the company is training and educating the sales associates to succeed with their product, generally the Company often wants to protect their invested time, company plans, and other information. (Confidentiality provisions may enter here) Why should the Company train a sales associate only to lose them to a competitor? Oftentimes, Medical Product Dealers and Medical Product Distributors (and some Independent Reps) carry multiple product lines that may be considered somewhat competitive in nature, but with price point differences, product capabilities, and the like, are they really competitive? As an example, if the end-user cannot be sold on a $50,000 unit whereas a portable unit offered at $15,000 is available should the independent rep be able to make that sale? What if: one unit offers better commission? Branded and/or highly competitive companies may have different preferences and specific feelings in this area.
Confidentiality: Address issues dealing with confidentiality of materials or information the company deems to be secret or otherwise protected such as customer lists, marketing material, sales plans, and other such materials. Merely stating in the sales rep agreement that materials are confidential or calling them trade secrets does not make it so.
Warranties and Indemnities: There may be provisions about warranties and indemnities and/or insurance on the part of the company as to the products. Hold harmless entry should be covered as well. Reps may prefer to see protective coverage extended to them, whereas the company may want coverage by the reps for errors in representation by the reps.
Assigning Obligations: The agreement should address the right of the sales representative to assign his or her obligations and duties and any restrictions thereon.
Notifications: Mention of the portal or carrier utilized for notifications, such as USPS Certified mail or other. Provide an address specific for notifications
Arbitration: May include a specific process in the event a dispute arises.
Return of Marketing Collateral, Tools, Supplies, and other items provided by the Company. This may include terminology regarding coverage of expectations for Providing Demonstration Units, Free Sample Units and free marketing material to your independent sales team, Sales Presentations and the return of same. In addition, this may include material provided for Training Your Sales Team members.
Below are Sample Agreements Presented by various companies to independent medical reps:
Sample (1) : Short version, capital equipment
Sample (2) Independent Sales Rep agreement: Residual, Pharma / neutraceutical product, sales goals based on disease state, percentage of the population for presenting sales expectations.
Sample (3) This independent sales agreement was utilized by a company promoting an orthotic. It presents a non-exclusive territory with territory exclusivity earned upon identified goals obtained. Residual component, sliding scale for commission earned based on volume…
Sample (4) – (Originated in NY)
Sample (5) – Originated in California
The Internal Revenue Service offers a multitude of information regarding Employees versus Contractors
IRS Publication: Independent Contractor (Self-Employed) or Employee?
IRS Publication: Main Content – Index
IMPORTANT: This information is merely presented as a General Discussion. MedCepts recommends you consult your legal advisor before entering into any agreement. MedCepts is not a legal advisor and never has any intention of offering legal advice. Help me today is almost always cheaper than a fix me tomorrow. To those seeking to “save” money by dispensing with sales agreements with creative commission compensation structuring, without the advice of legal counsel, beware that the cost of such “savings”, should a dispute arise, will likely be far more expensive than having done it “right” in the first place.