Forty half racks left a factory on a Tuesday and the person who sold them never touched a pallet, which is either the smartest structure in the equipment trade or a manufacturer rep agreement waiting to go wrong. The racks shipped direct. The commission was invoiced on shipment. Nine weeks later a chargeback appeared against three of those units for freight damage the agency had never seen.
- Two ways to sell a rack, and the paperwork between them
- The agency model: no inventory, no freight, no cushion
- The stocking model: margin you control and capital you tie up
- Six things a manufacturer rep agreement has to name
- Chargebacks are where a thin commission disappears
- Termination is the clause a manufacturer rep agreement gets wrong
- Thirty-five states have already written part of your contract
- Steps to take before signing the first line
- Founder questions on manufacturer rep agreements
- Can a principal take my customer back as a house account?
- Do I get paid on orders that ship after I am terminated?
- Should a new agency carry two competing lines?
- The model is a cash decision before it is a sales decision
Two founders can sell the same rack, the same cable stack and the same cardio row and run completely different businesses. One holds inventory in a leased warehouse and sells from stock. The other holds a contract, a sample bench and a car. The buyer often cannot tell the difference, and neither can a new founder reading a commission rate for the first time.
Two ways to sell a rack, and the paperwork between them
The stocking distributor buys the equipment, owns it, marks it up and carries every risk attached to a physical object. The agency never takes title. It solicits orders for a principal, the principal ships and invoices, and the agency is paid a commission governed entirely by a manufacturer rep agreement that most founders read once.
Everything that feels like a small detail in a manufacturer rep agreement turns out to be the business model. Who owns the account, what counts as a chargeback, when a commission is earned as opposed to paid, and what happens to the pipeline after termination are not administrative questions. They are the four levers that decide whether the agency is worth anything in year five.
The agency model: no inventory, no freight, no cushion
The appeal is obvious. There is no container to finance, no pallet racking to lease, no forklift, no cargo insurance, and no dead stock sitting through a slow fourth quarter. A founder can carry two lines out of a home office and reach positive cash inside a quarter.
The exposure is that every dollar of revenue depends on somebody else’s shipping department and somebody else’s accounts receivable. A commission earned on shipment and paid on collection means the agency finances the principal’s slow payers. A manufacturer rep agreement that ties payment to collection without capping the delay is a working-capital problem dressed as a payment term.
The stocking model: margin you control and capital you tie up
The stocking distributor sets its own price, controls delivery dates from its own floor, and keeps the customer relationship because it also keeps the parts. It also writes checks months before the money comes back, which is the pattern set out in our look at what a slow-turning rack costs in pallet positions.
Founders underestimate one thing consistently: the buyer treats whoever delivers as the responsible party. A stocking distributor inherits the service expectation whether or not it signed up for it, and that expectation has a payroll attached.
| Decision line | Rep agency | Stocking distributor |
|---|---|---|
| Capital at risk | Sample units and travel | Inventory, racking, forklift, cargo policy |
| Revenue form | Commission on orders shipped | Gross margin on resale |
| Freight and damage | The principal’s, unless the contract shifts it | Yours from the dock forward |
| Parts and service | Referred back to the principal | Expected of you by the buyer |
| Account ownership | Set by territory and house-account clauses | Yours until price takes it away |
| Cash cycle | Paid after the principal ships, often after it collects | Cash out at the container, in on net terms |
| What you can sell later | Relationships plus whatever the contract allows you to assign | A book of business with stock behind it |
Six things a manufacturer rep agreement has to name
Six items decide the economics: the commission rate and how it is computed, when a commission is earned, the territory and its exceptions, the house accounts, the chargeback definition, and the post-termination payment window. A manufacturer rep agreement silent on any of them is not simpler. It is simply resolved later by whoever has more leverage.
House accounts deserve particular attention because they are the most common source of quiet loss. Our review of how territory clauses treat house accounts covers the same mechanism from the distributor side of the table.
Chargebacks are where a thin commission disappears
A commission of a few points survives one chargeback and not three. The definition matters more than the number: some contracts charge back only on returns and credits, others reach freight claims, warranty parts, price concessions granted by the factory, and any discount a regional manager approves without asking.
The test to apply before signing is simple. Ask which chargebacks you can prevent through your own conduct. Any category you cannot influence is a deduction you are underwriting for somebody else, and it belongs in the rate rather than in the fine print of a manufacturer rep agreement.
Termination is the clause a manufacturer rep agreement gets wrong
Every agency eventually loses a line, usually after the territory has been built. The question is whether orders already in the pipeline pay out. A thirty-day termination right paired with no post-termination commission means the principal can take a developed territory and keep the quarter that was built for it.
Negotiate the tail while the manufacturer rep agreement is still unsigned and the principal wants your name on it. Asking for it after the first good year reads as a demand rather than a term, and by then the leverage has moved across the table.
Thirty-five states have already written part of your contract
Independent representatives are not left entirely to contract law. Carlton Fields, in its overview of using independent sales representatives to do business in the United States, notes that 35 states and Puerto Rico have enacted independent sales representative laws, with penalties in some states running to two or three times unpaid commissions plus attorney’s fees. The same overview cites Minnesota’s requirement of good cause for termination, with 90 days’ notice and 60 days to cure.
California is the example worth reading in full. A summary of the state’s wholesale sales representative statutes published by Trepanier MacGillis Battina describes a written contract requirement under Cal. Civ. Code section 1738.13 covering commission rate, payment timing, territory, exceptions and chargebacks, with treble damages under section 1738.15 for a willful failure to contract or pay, and attorney’s fees to the prevailing party under section 1738.16. A manufacturer rep agreement written for one state and used in twelve is a document with holes in it.
Steps to take before signing the first line
- Price the working capital before the commission rate. Model six months of travel, samples and show costs against the realistic date of a first paid order. The agency model is cheap to start and slow to pay.
- Get the house account list in writing, by name. A verbal assurance that there are none ages badly the moment a national chain asks the factory for a direct quote.
- Read the chargeback definition twice, then map it. List every deduction category and mark the ones your own conduct cannot prevent.
- Check the statute where you actually sell. The governing-law clause and the protective statute are not always in agreement, and several states limit waivers.
- Settle the post-termination tail before you sign anything. Name a number of days after termination during which shipped orders still pay commission, and put it in the manufacturer rep agreement beside the termination right.
Founder questions on manufacturer rep agreements
Can a principal take my customer back as a house account?
It can if the contract allows conversions, and many do. Look for language permitting the principal to designate accounts as house accounts during the term, rather than only at signing. If that language exists, negotiate a reduced ongoing commission on converted accounts instead of accepting a clean cut.
Do I get paid on orders that ship after I am terminated?
Only if the contract says so or a state statute supplies it. Many agreements pay commission on orders shipped during the term and nothing after. A tail of 90 to 180 days on orders already booked is a common ask and is far easier to obtain before the first year than after the third.
Should a new agency carry two competing lines?
Most principals prohibit it outright, and the ones that allow it usually define competing narrowly enough to matter. The safer path early on is complementary lines, which is the same logic behind how a line card gets built on the distribution side.
The model is a cash decision before it is a sales decision
Both structures sell equipment and both can work. One trades margin for speed and depends on somebody else’s discipline; the other buys control with capital that sits on a floor. Founders who choose deliberately, as described in our account of year one in the equipment trade, tend to survive the first slow quarter. The ones who drift into a structure discover which they chose when a manufacturer rep agreement is read out in a dispute.
