MANA Special Report:
A detailed look at what it takes to start, nurture, grow and maintain a successful independent manufacturers’ rep firm.
So, you’re starting a manufacturers’ rep company? Welcome!
Owning a manufacturers’ rep company can be a very rewarding career, financially and personally.
Financially, the manufacturers’ rep company that I founded let me put two daughters through college and graduate school with no student debt and pay off my home in 15 years instead of 30. And, it’s a business where startup costs are low and earnings potential is unlimited.
Personally, the rewards included developing close personal friendships with long-term principals and customers, and the entrepreneurial satisfaction that comes from creating a new business and building it into a thriving enterprise. Another reward is the ability to work flexibly from whatever location best suits me.
Launching your rep business, like any entrepreneurial venture, will require some risk and some sacrifice. Most new rep companies will take at least a year to become profitable, so you will need savings or other resources to support yourself until you become profitable. Expect to work long hours while you are getting your rep company established, and, as with any sales job, you should expect nine prospects to say no for each prospect who says yes.
But once you get past the first year or two, something magical begins to happen. Customers who bought during the first year or two continue to buy, and new customers you add as you go forward mean that each year you continue to operate your rep company has the potential to be even more lucrative than the year before.
And when you are ready to retire, with careful planning you can sell the rep company that you founded to new owners who will provide retirement income to you after you leave the company.
Sounds great, how do I do it?
This MANA publication will walk you through the steps of creating your own entrepreneurial rep company.
The opportunity to be an entrepreneurial business owner lies before you. By embracing the risks that entrepreneurs accept when they start a new venture you also open the door to potential rewards that can far exceed what you could achieve as an employee. But you won’t be alone in this venture. You will be joining a community of reps, and MANA stands ready to provide you with the information you will need to maximize your opportunities for success. This report, and many other educational resources that MANA can provide, will help you to fast-track your new enterprise.
A thriving ecosphere of manufacturers’ rep companies is what makes it possible for manufacturers to find great reps in every territory where they’re needed. MANA’s job is to help that ecosphere to flourish and grow, and we look forward to having become part of that that ecosphere and join the community of reps who serve manufacturers across North America and the world.
Charles M. Cohon
CEO & President
Taking the First Steps in Becoming a Rep
There are very few people who begin their business careers with the primary goal of becoming an independent manufacturers’ representative. Those who have set their focus on that target are generally those who are directly related to the owner of an agency. As a result, they occupy a position where they are the logical heirs apparent. The majority, however, are those that have fought their way through a variety of sales and marketing positions before deciding to make the move to become a rep.
Other than someone who has been born into an agency, what’s the appeal in seeking out this profession?
From what we’ve learned over the years, the primary attraction appears to be the search to do what they are good at — and to be able to go beyond the restrictions often found in the traditional climb up the corporate ladder. These restrictions include position (or rank) and income limitations.
Sure, the climb up that ladder often lands an individual in the executive suite. For the majority, however, it doesn’t. And in some companies, the top executive in the marketing department may be a fixture — someone who is not inclined to move in order to make room for a new face.
The fact remains that the majority of people who start their own agencies usually do so to grow when they feel they face limits in their present positions.
Then there is the ever-present goal of achieving personal freedom. Many prospective reps either see that they can go no further in their companies, or they see the company is not doing things the way they feel they should be done. Others dislike having their income capped — especially at the level of peers who only perform at mediocre levels.
Typical of the communications MANA receives from the aforementioned group of individuals are the following:
“I’m in my early to mid-40s, married with two children. I’ve spent the last 15 years in a variety of positions in a manufacturing or service company. I’ve reached the point, however, where my opportunities for advancement and income growth are becoming increasingly limited. I don’t see myself occupying the vice president of marketing position any time soon. As a result, I think it’s time to make a change and go out on my own — taking advantage of the knowledge of the marketplace that I’ve gained over the years. Naturally, I’m a little apprehensive about going out on my own, giving up the security of a regular paycheck and the corporate benefits that accompany it. But, I figure it’s now or never if I’m really going to realize my potential — and the standard of living I aspire to.”
Scenarios such as this are logical, somewhat predictable and make sense. In the past, we’ve heard from any number of people who are simply interested in changing their lives — but really bring no unique talent to the world of being a rep. For instance, consider the accountant from the Midwest whose desire it is to make the move to the West Coast. What better job to assume than that as a rep? It’s hardly that simple and there’s obviously something missing in the desire to relocate and do something new. What’s the individual’s area of expertise? What’s his level of knowledge about the territory, the industry, purchasing contacts?
Once someone who has a background in sales and a detailed knowledge of a specific industry makes the decision to become a rep, there are a number of variables that must be considered before taking the leap. We know you’ve heard this before, but since there are questions to be answered, it’s wise to come up with those answers so we can “look before we leap.”
What are your Qualifications?
First, let’s take stock of who you are and where you come from. For instance, if you find yourself out of work with no savings and no access to capital, let’s say the world of becoming a rep may not be recommended for you. It’s this person who is exactly at the wrong place in his life to be making this kind of decision. There’s an excellent chance he’ll feel the pressure, let problems distract him from selling and running his business and will ultimately fail.
If, on the other hand, you’re more like that writer who has contacted MANA in the past, let’s take a careful look. Like her, if you fit the profile of the typical startup (e.g., late 30s to mid 50s, married, 10–20 years of corporate sales experience, mostly in the same industry you desire to rep in, and have enough savings or equity in your home to get you by for at least one year or a spouse with substantial income), that gives you something to work with.
But, here’s another consideration. Are you the type of person who is an employee or an entrepreneur? If you’re the former and would miss the comfort and predictability of the weekly paycheck — don’t leap. Be advised, however, that in today’s corporate world, there can be a lot less security than in owning a small business.
If there’s a genuine “fire in your belly” to be your own boss, write your own ticket, take risks and be the master of your own future, take a step and move forward.
Having painted yourself as a risk taker doesn’t mean you should be moving forward without a plan, however. It’s hardly enough that you can point to a relatively successful past history in sales. What you’ve got to be able to do now is develop your business skills and plan for the future. Simply put, your business plan points you in the direction you want to be traveling — just as a road map will see you to your final destination on any trip. Included in this business plan, which many successful reps share and update with their prospective and existing manufacturers, are:
The key to any effective business plan is that it is constantly consulted, updated and changed to reflect changes in the business environment. Templates for basic business plans are available on the web or from MANA.
If you have determined that you’ve got that unquenchable thirst to be your own boss and can craft a plan to take you into the future, what about the personal skills you bring to the table? Profiles of successful reps show that they can point to a history of performing among the top 10-20 percent of their sales peers. Typically, to reach that level of achievement, reps have shown a continued positive outlook, are resilient in the face of adversity, exhibit a genuine desire to help others and have shown themselves to be proficient in the art of negotiating.
You might ask why the rep ought to possess the aforementioned attributes. Consider the conversation with one rep serving the safety industry who related that during the first year of his firm’s existence more than 15 years ago, his annual commission income amounted to $36. With that as your track record, try walking into the office on the last day of the year with a smile on your face unless you’re positive, resilient and want to continue to help others (i.e., your customers and your principals). Happily, this same rep can now look back on those days and smile as he recounts the steady growth his firm has achieved.
Any trip to the library or bookstore will present the visitor with shelves of offerings on the benefits of positive thinking. The main point here, however, is that if the rep startup is firmly grounded in reality with a concrete business plan and realistic budgeting, the ups and downs of the typical business cycle will be anticipated. Planning for the future will deflect the hard knocks that accompany any business venture.
Before we leave the subject of personal skills, let’s not forget about the ability to negotiate. Remember, negotiating skills differ from sales skills, and it’s skill in the negotiating arena that can spell success for the rep, not only in his relations with his customers, but also in his dealings with principals. Fifty percent of selling as a rep is selling the customer’s needs to your principals!
A successful rep always likes to point to his ability to protect his principals’ margins. To do so, however, he must be skillful as he sits across the desk from his customers.
At the same time, success or failure in the rep business can often be traced back to the rep’s negotiating ability when he talks contract with his principals. The pages of Agency Sales magazine have been replete with examples of reps’ abilities to negotiate favorable terms with their principals for missionary or territorial development work, post-termination payments and other non-traditional clauses.
Now that you’ve carefully considered your qualifications and hopefully determined that you possess the spirit, drive and talent to “roll the dice” as one rep so aptly put it, it’s critical to zero in on perhaps the three most important factors in determining whether you can make a go of it:
Maximizing the Benefits of an Industry Reputation
While the words “going where no man has gone before” sound great in the opening of each Star Trek episode, they don’t quite work that well in the world of the brand new independent manufacturers’ representative. Even though there are myriad ways to search for and attract lines and to finance your business, the fact remains that there is no better way to start your business than by working the same or similar ground that has become familiar to you over the years you’ve invested in your career.
There are plenty more examples of successful reps getting their start in industries and territories they are familiar with. If those examples don’t convince you of the value of working in and networking with people you’ve met over the years, consider the possibilities of the opposite scenario. Starting from scratch in a new area where you don’t know anyone is akin to sounding a death knell for a potential rep’s career. To this day we hear from MANA members who tell us they’re approached by people voicing an interest in the rep profession. They hear things such as “I’ve always wanted to be my own boss,” “Although I’ve never done it before, working in the (fill in the industry, e.g., sporting goods, electronic, industrial) industry sounds like it would be interesting” or “I’ve always wanted to live in California, I think I’ll become a rep there.”
With those, among many other reasons we hear, the only logical place for that person to start his rep firm would be by Googling the Internet in search of principals and customers. With that as a start, it may be a long time — if ever — waiting for that first commission check.
While we’ve concentrated on how important industry reputation and working in the territory where you are known best are for the nascent rep, how about the benefits such a reputation offers to customers and manufacturers?
A successful tenure in your territory provides the rep with people (e.g., customers) who know and trust you and will take the time to give you interviews to sell products. The knowledge of the industry and the needs of those customers allow the rep to operate as the consultative solution provider for his customers.
And then, there are the needs of the principals that can only be met by the experienced, knowledgeable outsourced salesperson. The fact is, many independent reps have spent their earlier careers on the manufacturing side working for companies that are larger than those they are currently representing. As a result, they have a wealth of corporate experience they can bring to the relationship. They bring operational ideas, marketing expertise and even technical innovation to their principals in addition to the expected selling skills and customer relationships.
Attracting Good Lines
We can’t overestimate the importance of having an industry reputation to put to use to springboard your career as a rep. Perhaps there is no other area that is more important than in the rep’s ability to attract and sign good (e.g., reliable, profitable) lines. Having said that, however, reps use any number of tried and true methods to identify, attract, sign and maintain profitable product lines.
While many agents start out with a line or two in hand, they then have to look for additional lines to make the business grow. Perhaps the most common question MANA and Agency Sales are asked is, “What’s the most effective way to locate dependable/profitable principals that will complement my business?”
Here are some suggestions that might provide a partial answer to that question:
MANA can help in several ways:
It’s appropriate to note at this point new reps — and existing reps — should be very much aware of how important it is to have a written contract with their principals. The written contract is required in many states and countries, and experienced reps will emphasize that a well-written contract goes a long way toward heading off problems down the road with principals.
Locating and Maintaining Profitable Accounts
This is the next logical step once you’ve set up your agency and hopefully roped in the lines that fit your talents. To achieve this goal, the successful rep will have to exhibit the expected talents of sales and product expertise, knowledge of the territory, a desire to succeed and an entrepreneurial zeal that will help him stay the course. Along the way, there are some additional talents he must possess:
Obtaining the Necessary Financial Backing
Those among us who have struck it rich in the lottery or have inherited a small fortune can skip this next section. But for everyone else, financing a business is of prime importance. Going in, it’s been traditional to recommend that the rep start-up owner have at least enough cash to provide living expenses for one year. With long lead-time products and/or long sales cycle products and services, however, the recommendation is moving up to a two-year supply. Now here’s the question — where’s that cash coming from?
First, let’s cover some general information.
Minimum start-up cost categories, excluding salaries, benefits and other items related to employees (even if you are the only employee), will include expenditures for: office and administration; hardware and software; company image; automobile; legal and accounting; various dues and fees.
Keeping those costs in mind, the agent just beginning his rep career often operates with an unrealistic sense of what it takes to get the agency off the ground and running. Here’s where the existence of a well-crafted business plan — something we’ll cover in the next section — comes into play. A business plan that does not include the start-up, and more important the daily operating cost, may not allow the new rep to make it to the hoped for break-even day.
To reach the ultimate goals of financial independence and security will take some professional analysis, coupled with some seat-of-the-pants “guesstimates.” It’s necessary to map out fixed and variable costs, including daily operating costs and the amount of revenue that can potentially be realized in a given period of time.
With all of this as an introduction, there are some fundamental principles that must be addressed by the new rep.
In looking back at the roots of their beginnings, successful reps generally report that they seldom come armed with the type of equity banks are willing to consider as loan collateral. The question remains, where and how do I pull together funds that will allow me to begin and run my business?
For your consideration, here are some approaches to the question:
More and more rep firms and more and more start-ups are finding that their principals are more than willing to lend an ear when it comes to agreeing on creative compensation plans. And, many of these creative plans can work to get the rep over the rough spots with their cash flow. They can also reduce the one- to two-year living expense requirement mentioned above.
You might ask, why would a manufacturer be so willing to help out a rep? Thankfully, the number of manufacturers that realize the financial benefits of working with an outsourced sales force is rising. A number often referred to when considering how much it costs to keep a direct salesperson in the field is in excess of $160,000 annually. The fledgling agent would do well to consider this number whencrafting his own budget. At the same time, experienced manufacturers have realized that it’s much less expensive to support a rep in the field. As a result, why not try something different when it comes to compensating them for their efforts? For instance, it’s hardly unusual for the rep to set up a draw vs. commission arrangement with principals. Many have reported success in negotiating monthly shared territory development fees, especially when it involves missionary work on behalf of the manufacturer. MANA has periodically run seminar and webinar programs on how to approach prospective principals for shared territory development costs. There are others who rely on progress payments on long-term contracts, territory development fees and requests for payment upon product shipment, as opposed to payment upon collection.
There have been several articles on this subject in the pages of Agency Sales.
But the message here is, don’t be afraid to discuss/negotiate with your manufacturers. As many have been before you, you might be pleasantly surprised.
This type of loan is one that is made against the value of the house. These loans are available in most states. But just to be sure, check with your local banker.
In some cases, banks will make these loans as a line of credit, rather than outright cash loans. The money is made available to you to use when needed. This can be especially helpful for any agency that sees capital needs as steady flow over a certain period of time, rather than needing an in-hand amount of money.
Bankers are usually very careful about credit ratings and the borrower’s ability to pay back the principal and the interest. But, if you’re borrowing for expansion and can show good credit and an ability to turn your efforts into money, banks probably will be willing to make you a home equity loan. Having a great business plan to show the loan officer can really help!
Perhaps the most practical way for getting money for the typical agent is by refinancing an existing mortgage. This means that you negotiate an entirely new loan, replacing the existing mortgage with one carrying a lower interest rate. The lower rate is compensated for by extending the length of the mortgage. The demand for real estate loans and the prevailing trend for interest rates and the amount of equity you have will be a factor here, and you may be able to take some equity out in the form of cash.
There is no free lunch; however, with good refinancing you can have a pretty good meal at minimal cost. Just be sure to understand the risk of taking on additional debt.
Starting or Buying an Existing Agency
Before we leave the subject of how to finance the start-up of an agency, it’s worthwhile to mention that in lieu of starting your own agency from scratch, there always exists the option of buying an existing firm. Many times the new rep will go to work with an existing agency with the understanding that three or four years down the road he will buy out the owner. The benefit of this type of arrangement is that the individual who is relatively new to the rep profession can learn from an established professional, get his feet wet and truly determine if the world of the rep is for him. However, it should be noted that there are also risks in this type of arrangement and legal advice is a must in these situations.
The oft-quoted Yogi Berra is alleged to have said, “When you come to a fork in the road, take it.” Interesting if not very profound or useful advice, but it reminds us of the importance of having a map or a plan to guide you on your mission of becoming a successful and prosperous manufacturers’ representative.
More applicable than Berra’s words is some advice we’ve heard from a number of business consultants: “If you don’t have a plan, it’s easy to get where you’re going. And where you’re going is nowhere.”
What a business plan provides the rep is direction and a sense of the big picture.
There are countless details the rep is faced with in the efficient operation of his business. While you might be spending today making customer calls, tomorrow you’ll be focusing on taxes, and the next day you’re just trying to keep up with the paperwork. As a result, it’s easy to lose your way. A business plan won’t make all the details of running the business go away, but what it will do is to put all the details in relative perspective. In addition, it can provide a timetable that anticipates challenges, irons out difficulties and makes all your work go smoother.
If the business plan is properly put together, it also will provide you with a series of checkpoints that you can review from time to time and make sure you’re heading in the right direction. In addition to serving as a business “map,” the business plan:
A well-thought-out business plan should include at least the following elements:
The time-honored process of conducting a Strengths-Weaknesses-Opportunities-Threats (SWOT) analysis is mandatory for the independent manufacturers’ representative’s agency start-up. This exercise allows the novice rep to take a clear and objective view of himself and the capabilities of his operation. Are the individual’s personal strengths sufficient to outweigh any obvious weaknesses that might hinder his growth? If a weakness is obvious, what can be done to compensate for it? What does the future hold in terms of competitive threats and challenges? Will the rep be able to weather competitive and economic storms?
The answers to these and other pertinent questions should be contained in the SWOT analysis.
2. Getting started
Be sure to have clearly written and understood mission and vision statements. Understand who and what you are and what you want to become. Spell out your business strategies and action plans and assign completion dates for the action plans so you can monitor your progress.
Your mission statement spells out the reasons you are in business and those qualities that differentiate you from the competition. A vision statement is a synopsis of your overall long-term objective.
3. Setting strategic goals
Having completed your SWOT or “situation” analysis and verbalized your mission and vision, it’s time to set the five to six key strategic goals that will drive your business toward your vision for it. Strategic goals are broad, sweeping objectives as opposed to action plans, which are tactical, short-term objectives. Strategic objectives are the five to six guiding principles by which you will drive your business toward your vision.
Examples of strategic objectives might include:
Examples of what strategic goals are not:
The latter two statements might be components of the Action Plans you will develop under each of your strategic goals.
4. Action plan
Action plans are specific, short-term tasks that need to be assigned to you, an employee or outside advisor that will reinforce, or move you toward your strategic objectives and ultimately to your vision. Each action plan will be composed of three components:
Examples of action plans under Objective #1 (above) might be:
These so-called “action plans” are limited in scope, very tactical or short-term in nature and are much more measurable than the broader, strategic goals that they support.
5. Financial projection
The final element of this suggested, abbreviated business plan is your financial projections. This will include a detailed sales and commission flow forecast, plans for other revenues such as retainers and a detailed expense budget for the first three years of operation. The numbers in your plan need to match your words. In other words, you will have to cost out each of your action plans and budget accordingly for them. If, in the course of detailing your financial projections, you find that you will not have enough revenue to fund a given action, you need to go back to the drawing board.
As an example, if the projected revenue from the two core items mentioned above in Objective #1, Action Plan #2, do not allow for the hire of a part-time office manager, it might force you to rethink how you will negotiate your year-one compensation with those two lines. Will they pay a retainer until commissions start to flow? How about a draw or a higher than normal rate of commission for year #1? If not, you may have to postpone the hire of the inside person.
The business plan steps mentioned above are basic and should be a part of any new agency’s business plan. There are many excellent books and Internet services available on the subject that can be used to produce a polished business plan for any circumstance.
6. Executive summary
This section is a synopsis of your business plan. Anyone interested in your agency should be able to read it and obtain a clear picture of just what you are planning to accomplish. It will be the last part of the plan you write, even though it will appear first. It must be well-written in order to induce the reader to read the entire plan.
Next, if the individual starting an agency comes from a corporate environment where he’s been used to delegating to others, get ready for a change. Take stock of your individual talents and then determine what you can reasonably do yourself and be prepared to outsource the remaining tasks to outside providers. If your writing skills are lacking, for instance, you may want to hire a journalism or English student to polish the final version of your plan.
Some other elements to consider include:
While we’ve already covered in some detail how much capital will be needed to keep you afloat until commissions start rolling in, it’s important to commit that information in writing to your business plan. A working business plan will include realistic checkpoints so you can see if you’re moving ahead or losing ground.
There’s an ad that has appeared on television where, during a staff meeting, the CEO goes around the table asking for reports on information technology, organizational infrastructure, expansion plans, etc. He comes to one manager whose report consists of throwing a shirt on the table. The CEO asks, “What’s that?” The answer from the manager is, “This is what we are. This is what we do. We manufacture and sell shirts.” The CEO nods and agrees that everything else is a peripheral activity. So too, with the manufacturers’ rep agency. While your job is selling, others will have additional tasks for you to perform. Your business plan should be flexible enough to include these variations and to show you just how a principal’s or a customer’s requests will impinge on your nicely worked out plan to make money. But it should also allow you to keep your focus on the ball — selling.
Tax and legal requirements of your state, province and your federal government will dictate how you keep your records. However, there are myriad other record keeping tasks that must be kept in mind. Each of your principals will have many customers. And there will be several people at each customer site you will have to know and work with. You will have to know where each of these people is on their way to becoming one of your customers. To assist in this area, there are many viable computer contact management programs that greatly simplify this workload. But unless you plan from the start, getting up to speed halfway around the track will put you at the back of the pack. One Chicago rep in particular is a good example of succeeding in this area. He boasts with pride that “from day one we’ve worked overtime to build and maintain an accurate and timely database of our principal and customer contacts. It’s that database that has allowed us to grow and prosper.”
Whether you hire sub-reps or other staff or depend entirely on outside suppliers, you’re going to be working with others. The business plan should be specific on the relationship you will have with all those who deal with the sales agency.
Since the majority of MANA members are one- to three-person agencies, not a great deal of space is needed to operate the business. But space dedicated specifically to the agency is needed, nonetheless. Many opt for an office in the home, while others seek rented space. In any event, these decisions must be made and budgeted for.
While most agents don’t buy, stock or sell products, this is something that should be included in the business plan, if you plan to do so.
More and more agents are performing the task of advertising and promoting their agencies. Often they find this is an ideal way to raise the profile of the agency and draw attention to the firm’s capabilities. In this age of electronic communication, the ubiquitous website has become increasingly popular. Many manufacturers will not consider appointing a rep who does not have a website because of the level of professionalism one exhibits. Include this in your plan and make sure you assign the marketing/advertising/promotion task to a trained professional.
After writing your business plan, many nascent reps have found great value in making an effort to learn from others. We’ll define “others” as advisors/consultants and business mentors. The importance of such advisors was emphasized during a meeting of attorneys who have carved out the manufacturers’ representative as their specialty or niche. One attorney said, “It’s critical for a rep to find an attorney who is experienced in the laws applicable to reps. They find it very comforting to talk to someone that they don’t have to explain what a line card or house account is.” If that’s true for attorneys, it’s equally true for all the advisors a rep should have in his stable — banker, accountant, financial planner, insurance agent, etc.
When it comes to locating and consulting with mentors, let’s start with your association. What better place is there than MANA to find like-minded people? And those people can be found under the MANA umbrella at MANA seminars, conferences or in the Online Directory. In addition to MANA, reps should seek out, join and become involved in their industry-specific rep associations (e.g., National Electrical Manufacturers’ Representatives’ Association (NEMRA), Association of Independent Manufacturers’/Representatives, Inc. (AIM/R), Electronic Representatives Association (ERA), Power-Motion Technology Representatives Association (PTRA), etc.).
And, don’t just start and stop with your rep associations. Local business and industry organizations, local colleges and universities, the Small Business Administration, etc., can all contribute to the speedy navigation of the learning curve and allow you the luxury of avoiding the exercise of reinventing the wheel.
Finally, remember that your business plan should be treated as a living, breathing document. It’s not something to write, place in a file or drawer and forget about. Rather, it should be shared with principals, advisors and business associates, constantly updated and changed to meet the changes and challenges of your agency.
Choosing the Form of Your Organization
Before we leave the subject of an agency’s business plan and the need to set the direction you want to follow for the future, it’s important to decide upon the type of legal organization that best suits your needs and desires.
The type of organization you choose for your agency affects not only how you pay taxes, but how you pay taxes when you sell the business, the liability you assume and other important considerations. Before we proceed, it’s important to note that the type of organization you choose for your agency is a subject that best makes the argument for the need for top-flight, professional, experienced advisors (e.g., legal, accounting and financial).
What follows is a brief discussion of the major types of organizations.
This type of organization is not a legal separate entity from the individual. All profits and losses are reported by the owner (usually on a Schedule C) and are subject to the individual tax rates.
The sole proprietorship is simple and cost-free to organize. Administration and set-up of this organization are simple, and the individual can shift and withdraw funds without tax or legal limitations. One must usually file a DBA (doing business as) announcement when starting a sole proprietorship.
There is no need to pay state or federal unemployment tax on salaries paid to the owner/employee, although the individual is still subject to self-employment taxes.
While you keep in mind the benefits of a sole proprietorship organization, there are some disadvantages to such a setup. There is unlimited liability to the single owner; less favorable tax treatment for fringe benefits and lenders may be less willing to lend to the individual. And finally, the intermingling of business and personal assets can pose a potential problem.
This organization is a separate legal entity that files an annual tax return. There is only one class of partner. The income resulting from the partnership is passed through to each owner via a K-1 form. Each partner is then subject to taxes at the individual rates.
Just as the sole proprietorship, the general partnership is simple to form, administer and operate. Since it provides a pass-through tax entity, it is flexible in allocating income and losses.
On the negative side of the ledger, there is unlimited personal liability. Each partner can bind the partnership as an agent. It lacks the continuity of a corporation because dissolution can occur unintentionally. And it allows for less favorable tax treatment for fringe benefits.
The limited partnership is a separate legal entity that files an annual tax return. In this organization, there are two classes of partner — the general and the limited. The general partners have control over the management of the partnership. At the same time, they have unlimited personal liability for the actions of the partnership. The income resulting from the partnership is passed through to each owner via a K-1 form. Each partner is then subject to pay taxes at the individual rates.
Among the positives with this type of organization is that it is a pass-through tax entity and limited partners have limited personal liability, but are limited as to participation and control of the partnership.
With advantages come disadvantages, however. On the negative side, the limited partnership is somewhat more complex to form and operate. There must be at least one partner with unlimited liability. And, general partners must contribute adequate capital to ensure partnership.
Limited Liability Company
This organization offers the limited liability of a corporation with pass-through taxation of a partnership. It is a separate legal entity that files an annual tax return.
With this organization there is limited liability for all members. A member may participate in management without losing the liability shield. It is a pass-through tax entity and members’ interests may be issued for promise to make future contributions. There are liberal membership requirements — any person or entity may be a member with no limit to the number of members. Members’ tax basis includes members’ shares of LLC liabilities — this is litigated, though. There is more flexibility in allocating profits and losses.
Among the disadvantages to this type of organization is the fact that there are legal uncertainties such as operating in a state without LLC legislation, thus losing the liability shield. Also, lenders and other institutions may be less comfortable with this type of organization and two or more members are usually required.
The C Corporation is a separate legal entity that files an annual tax return and pays taxes. Distributions or dividends are generally taxable to the shareholder and not deductible to the corporation.
The C Corporation provides limited liability; however, guarantees are often required and thin capitalization or failing to observe formalities can “pierce the corporate veil.” Transferability is relatively simple and the continuity it provides is more attractive to lenders and other creditors. The C Corporation can reduce income tax by splitting income or leaving profits in the corporation. It provides for favorable treatment for fringe benefits and a non-calendar tax fiscal year may be chosen. The C allows for creative ownership such as preferred stock, warrants and options. This organization could qualify for 50% capital gain exclusion for qualified small business stock upon sale.
Among the disadvantages that may accompany the set up of a C Corporation are:
This organization is a separate legal entity that files an annual tax return. Taxes are treated as a pass-though similar to a partnership. Distributions or dividends are not taxable events.
Double taxation is avoided with the S Corporation because taxes are a pass-through entity. Like the C Corporation, there is limited liability; however, guarantees are often required and thin capitalization or failing to observe formalities can “pierce the corporate veil.” Transferability is relatively simple and the continuity provided is more attractive to lenders and other creditors.
There are a few disadvantages accompanying the S Corporation, however. For instance, there is a limitation on ownership and structure: no corporate or partnership shareholders; no more than 75 shareholders; and only one class of stock is available.
Pass-through losses are limited to the shareholders’ basis. Fringe benefits are deductible by the corporation but taxable to the shareholder employee with more than two percent ownership. The tax treatment of pension/profit sharing is similar to the C Corporation, but five percent shareholder employees cannot borrow from the plan. Overall, tax issues can be complex, especially when converting from a C Corporation. This is the form of organization most current members of MANA choose.
As we explained at the outset of this discussion, it’s very important when determining the organization of your agency to seek the guidance of qualified tax and legal professionals. That simple step can pay for itself.
What we’ve covered thus far have been primarily internal considerations that aid in the determination of whether an individual could or should pursue a career path leading toward becoming an independent manufacturers’ representative. Assuming all prior considerations paint a positive picture, there are a number of external trends that currently exist that:
Reps’ Services are in Demand
MANA does not count the telephone calls or Internet inquiries received monthly, but we do know that scores of manufacturers each month ask about the association and its rep membership. In addition, from the contacts we maintain with other vertical rep associations, we learn that they are experiencing this same level of activity.
This trend indicates that more and more manufacturers are receiving the message that reps remain as the viable outsourced option for conducting their businesses. That message takes on increased importance for manufacturers as they find themselves in a position where, spurred by the pressure of the economy just a couple of years ago, they now find themselves with increased capacity on their hands — and feel the pressure to sell that capacity. But, the question remains, how are they going to do that?
Many of these same manufacturers have now been caught with the expenses they incurred to meet increased need, and closing plants is hardly an option they want to entertain. As a result, there’s an obvious attraction for the role the manufacturers’ representative can fill for them in marketing that excess.
Added to these developments is the fact that the rep of today has rapidly ramped up the level of his professionalism — and with that upgrade comes serious improvements in productivity for both the manufacturer and the rep.
Lack of Knowledge of the Rep’s Role
As manufacturers continue to turn toward reps in growing numbers, many of them find themselves in need of an education concerning what role reps fill and how to effectively work with them. Agents continue to get calls daily from what we might call “principals in need of education” and should steer them to MANA and to their educational programs. Otherwise, these principals can be difficult to work with.
The Impact of Overseas Business
Another important trend we see is that if a rep represents a commodity product, the success of which is based on price, often he’s better served by locating an offshore manufacturer vs. a domestic supplier. And, while it would be a mistake to generalize, reps usually are more successful selling engineered products, services and systems than commodities. Some manufacturers located in Europe, Asia, etc., can make the product as well and have lower labor costs, thereby making the product more competitive in the U.S. market. Data collected by MANA indicate that more than half of the association’s membership presently represents foreign manufacturers. Among those working internationally, the manufacturers they represent are located in 42 different countries with the top three being Canada, Germany and China. Be sure to understand the special risks and opportunities that accompany working with offshore companies.
Agency Compensation Plans
The common understanding among manufacturers remains that the independent manufacturers’ representative is only paid when he sells something. As a result, manufacturers have been able to get a fix on the cost of going to market with their reps. What has happened over the years, however, is that an increased number of demands have been visited upon reps and the manufacturer is requiring that additional tasks be performed. One problem is that often little or no adjustments in compensation follow on the heels of those added tasks. A trend we are seeing, especially with foreign manufacturers that work with U.S. reps, is that reps are looking to get paid for their services, e.g., pioneering work, credit checks, setting up other reps, market research, warehousing, etc.
As a result of this “more work for the same or less pay” trend, agencies should realize that the demand for rep services is much higher than the supply of agencies looking for lines today. This, coupled with the extra demands of many principals, requires that agents negotiate from a well-deserved position of strength when taking on new lines. As has been well-documented in the pages of Agency Sales magazine, many reps are asking for and receiving retainers, some territory development cost assistance and longer post-termination commission periods.
A Marked Growth in Productivity
A direct result of the last development — the expectation of more work for the same or less compensation — has forced reps to keep up to speed with the latest in management techniques and the application of the latest in technology to their daily business activities. A visit to the typical rep firm will find a company loaded with all of the predictable “tools of the trade” including laptops, smart phones, websites, PDAs, etc. You may also find the social media sites helpful in promoting your firm.
There’s no doubt that these “tools” allow the rep to become more productive That’s just the kind of evidence the manufacturer looks for when considering whether to make the move to an outsourced rep sales force. More and more, our manufacturer associate members tell us they seek complete businessmen, not just salespeople.
Not to make the process of starting an agency any more challenging than it already is, but once a prospective agent has cleared the hurdles of truly determining whether he’s qualified, obtained financing and reputable lines, developed a business plan, considered trends affecting the industry, etc., there’s more to be done. Here’s where we get into the area of exercising those talents or coping strategies that will provide the rep with the best chances for survival and success in the future. There are any number of talents the rep had better possess, but for the purposes of this discussion, let’s concentrate on what MANA has determined are the “Reps’ Success Strategies for the 21st Century.”
The Importance of Becoming the Complete Business Person
Armed with as many lines as he could gather, one rep opened his agency in the basement of his home near Chicago in 1984. Despite his rather humble surroundings, his underlying desire was to project the image of the complete business person. That image was put in place from day one as he put his best foot forward in the form of professional letterhead, business cards, etc.
“While I knew that I was just one guy alone in this basement, that’s not the image I wanted to project. From the beginning I made a continuous effort to improve the sorts of things that would be visible about me to the outside world. I was always upgrading my business cards, company profiles, making sure that everything I sent out was ‘first class.’”
Today that rep finds himself at the helm of a prosperous eight-person agency specializing in products sold to OEMs and distributors serving OEMs.
“Continued education” is an appropriate umbrella phrase to position at the top of a discussion for the need for reps to become complete. However, there’s more to it than that. What we’re talking about here is a philosophy of education that goes beyond the environs of traditional academia. With degree in hand, the manufacturers’ representative is still not necessarily the businessman he should be. What must be accumulated for many reps is knowledge of engineering, accounting, MIS, management, psychology, human resources, teaching and communication.
These skills can’t be acquired and mastered with a snap of the fingers, however. Thankfully, there are many options available to the rep including seminars, webinars, teleforums and other training programs available from MANA and industry-specific rep associations’ programs.
While all these programs are geared specifically to the needs of the rep, the individual should also consider executive MBA programs and courses available from local community colleges.
Then there’s the need to be educated about customers and their needs. The most valuable asset in this area is the information contained in the rep’s database. This serves as a virtual treasure trove of information about customers and the territory.
“Consultative selling isn’t necessarily a term found in my vernacular,” offers a Canadian rep in the plumbing industry. “With the products I represent, however, the practice of serving as a consultant is more common than not. Because of the markets we serve and the products we represent, on a daily basis we’re presented with opportunities to be problem solvers/answer providers for our customers. It’s hardly unusual for a customer to be presented with a problem that we know we can solve with one of the products we carry. Presented with this situation, it becomes a lot easier for us to sell something from one of our principals.”
Those “real-world” words provide more proof of the value of consultative selling than any textbook or seminar on the subject.
Consultative selling is exactly what it says — the manufacturers’ rep must serve as a consultant to his customers. That’s his value add, and to provide that value add, it’s vital that he understand the customer’s entire business system. It is only then that he can be sure to meet the needs of the customer. But how does he go about it?
The first step for the rep is to be sure that he knows more about the customer than the buyer does. All too often, the company’s buyer possesses only a personal perspective gleaned from the needs of his own department.
The rep, on the other hand, has to understand the entire concept of the customer and be able to work across departmental lines in order to meet their needs.
In reality, when the rep does his job properly, he can find himself drawing together people from different departments. He can, in fact, find himself serving as a coordinator or “ombudsman” for getting the job done.
That task can only be done, however, by possessing the necessary speaking, listening and writing skills — all of which the rep has to work on continually.
The end results of consultative selling efforts are seen in the rep’s ability to:
A major benefit that the manufacturers’ representative provides for his customers and his principals is the “basket of goods” he offers vs. the single-line offering of products the direct salesperson has at his disposal.
When reps are seeking additional lines, of prime interest to them is the fact that any new products should add to, or complement, what they have already.
Reps understand customers’ systems, and it’s in line with the business plan that they sell solutions. As a result, it’s the synergistic line of products he offers customers that gets their attention and allows him to “scoop” his single-line competitor.
One of the longest-standing and vocal proponents of synergistic selling is the late consultant/author/instructor Jack Berman. According to Berman, “The only reason for the manufacturers’ representative’s economic existence is that he can spread his investment on a sales call over many lines. As a result, he can make more calls for manufacturers.”
He goes on to explain the three-way benefit of synergistic selling:
When two rep firms consolidated operations in Upstate New York a couple of years ago, here’s what they found: “Sure, we had computer operations, but they were relegated primarily to rep software packages. They weren’t anything that could be used for the management of the company or for more efficient communication.”
Faced with the hardly enviable task of succeeding while those around them are virtually exploding with technological innovation, the agency partners put in a whole new computer system, provided salespeople with laptops and smart phones, embarked on a program of intensive training, and are now looking forward to the day when the office operations will be “paperless.”
If this experience illustrates anything, it is that in addition to sales and business skills, perhaps no skill is more important today — and tomorrow — than that of being technologically up to date. The rep that enters the fray technologically unarmed is an anachronism. When we speak of technology, more often than not we’re referring to smart phones, laptops, tablets, contact management and accounting packages. But there’s more. Today’s rep must also possess the ability to create and effectively use his own customer database and exhibit an understanding of the customer’s management information system (MIS). The absence of these skills precludes the rep from being able to provide the customer with an integrated solution to his problem(s).
Maximizing Relations With Principals
Half, if not more, of the rep’s selling effort is expended on his principal. The rep’s job is to match the customer’s needs with the manufacturer’s capabilities. To do so, he often has to persuade the manufacturer to bend his policies or think creatively to solve the customer’s problem. As a result, it’s imperative that the rep establish the best possible relationship with his principals. The only way to achieve that goal is to treat the principal as you would a customer.
Principals are your clients, and client relations should be the rep’s number one priority. The rep should serve as their eyes and ears and offer themselves as the principal’s consultant/partner.
Here’s how one very successful rep in the Midwest describes his constant drive to learn all he can about his principals and to understand what makes his marketing partners tick: “I can’t overemphasize how critical a thorough knowledge of your principal is. This isn’t something that’s accomplished overnight, however. Rather, it’s an ongoing process — one that’s an integral part of the rep’s daily job.
“The principal that I represent has eight separate business units. To learn what we need to know about them isn’t necessarily a simple process. It’s not like you can just open a book or visit their website and read about them. You must meet with as many of their people as you can, get to know them and actually drum up your own case studies to learn how they operate in various situations. You have to thoroughly understand their business philosophy if you want to properly represent them in the field.”
Here are seven steps this rep takes in his constant drive to gather that knowledge and understanding:
If MANA’s increased presence in Europe, its membership and participation in the International Union of Commercial Agents and Brokers (IUCAB) and its very successful Study Missions to China show anything, it is that the world continues to shrink. Foreign markets often are the source for the niche products the rep is looking for. Technological communication tools allow reps to conduct business for anyone, anywhere in the world.
Adding credence to those words is one MANA member who has already paved a business path for himself in the Far East and Vietnam: “Our customers are demanding that we provide them global options/solutions. If our customers and principals are to succeed, they must understand the world and the world economy. While communication tools have made the process easier, we must also develop relationships in foreign markets in order to succeed. Visiting, knowing and building trusting relationships will prove to be the keys to conducting business globally.”
The True Value of Rep Associations
One Midwestern rep not only “talks the talk,” he proudly and effectively “walks the walk” when it comes to membership in rep and other industry and professional associations. The visitor to his agency offices will see the membership plaques for MANA, NEMRA, and a variety of other trade organizations. But this rep has done much more than just join — he’s participated and reaped the benefits of that participation.
“When I bought this agency almost 17 years ago, I thought I knew everything there was to know about being a rep,” he explains. “It didn’t take me long to learn differently, however. Major factors in teaching me what I really had to know were the industry associations I joined.”
MANA couldn’t agree more, and as a matter of fact, the association has long preached the value of association membership to its members. Furthermore, the list of MANA members includes many who see the value of their membership in more than one rep association, whether it be NEMRA, AIM/R, ERA, PTRA or any of a number of other organizations. But the fact remains that gaining and maintaining membership is hardly enough. The member of an association should avail himself of the information, knowledge, wisdom and educational and networking opportunities that abound in these associations.
There’s an oft-repeated refrain that “You only get back what you put in.” Those words are never truer than when considering your association membership. The more a member contributes, the more benefits he gains in return.