In times past, salespersons used to go door-to-door to sell a variety of goods to households, including vacuums, encyclopedias, and beauty products. The standard business model was to pay these representatives on a commission basis rather than a salary basis. This meant that they would only get paid in the event of a sale. While today’s economy has seen the near extinction of door-to-door sales tactics, the use of brokers (sometimes called agents) to promote goods and services remains.
If done correctly, the use of brokers to increase your client base can be a win-win for both sides. The risk for your business is minimal, because you only need to pay the agent if their efforts generate income from new clients (referral clients). It also incentivizes the broker to bring in business in order to be rewarded. If you’re contemplating the use of brokers or other representatives to drive customers to your business, then there should be a written agreement between each broker and the company specifically detailing each party’s expectations. Here are some of the common issues that you should pay attention to when negotiating any agreement with a broker.
Brokers who work for multiple companies (for example, recruiters or real estate agents) might have their own standard fee agreement that they use whenever they work for a new client. Any document prepared by the agent will likely contain terms as favorable to the agent as possible. This requires either you or your legal counsel to carefully review the agent’s proposed draft, which can cost you time and expense. As such, ideally, the agreement between you and your broker should be based on a pre-prepared form that comes from you (your boilerplate contract), not the broker.
If your company has an existing boilerplate agreement (that has preferably been drafted in consultation with your legal counsel), then you can use that document every time you hire a new broker. If you don’t have a corporate attorney to help you prepare your form fee agreement, then see How to Draft a Letter Agreement or an MOU and Ten Tips for Making Solid Business Agreements and Contracts for tips on how to draft your own contract. The vast majority of broker agreements are very simple documents that are no longer than a few pages.
Broker commissions typically take one of two forms: flat rates or a percentage of income. The flat fee is the easiest to calculate because there is no computation. Instead, you agree to pay the agent a specified dollar amount upon the occurrence of a particular event. The trick with a flat broker’s fee is that the contract must precisely define the event that triggers the broker’s right to a commission. In other words, you want to avoid the situation where, due to ambiguity in the agreement, the broker believes that a fee is due and forthcoming and the company disagrees. The triggering event should be described in such a way that it can be proven by either one party or the other. This might require one party to share financial data, client communications, bank statements, or some other information with the other party in order to determine whether or not the broker has earned a commission.
You can creatively negotiate a flat fee structure that provides additional broker incentives. You can add performance benchmarks to the contract (based on the number of clients referred or the amount of revenue generated, for example) that increase the flat fee amount once surpassed. It is also possible to start with a flat fee, and then offer the broker a percentage fee thereafter, using similar benchmarks.
When a broker receives a percentage-based commission, the company is required to pay the agent a portion of the income it receives from the referral client. When including a percentage-based commission in your contract, your primary objective should be to specifically define the dollar figure that the fee calculation will be based on. For example, will the broker’s fee be based on the gross revenues received from the referral client, or will the calculation take into account certain deductions for taxes, expenses, and the like? The clearest way to describe a percentage-based commission is to not only explain the calculation with words, but also provide an example with actual numbers so that both parties have a visual representation of the calculation process.
If the contract is drafted properly, the triggering event for a percentage-based broker’s fee should be fairly simple — the agent only gets paid after you get paid. This method should ensure that your company never suffers a net financial loss when it makes payments to the broker.
The agreement can provide that you’ll compensate the agent within a certain number of days following your company’s receipt of payment from the referral client. Alternatively, it could state that you’ll collect all earned commissions and distribute them to the agent on a periodic basis (for example, weekly, bi-weekly, or monthly). Furthermore, the contract should delineate whether are not your company will pay a commission in connection with every single payment received from the referral client (in perpetuity) or only on a one-time basis.
The broker’s agreement should include sufficient protections for the company in the event that your separate agreement with the broker’s referral client results in a dispute or termination (a Referral Client Dispute). In other words, you want to avoid a situation where you’ve already paid the broker a commission, and then the referral client demands a reimbursement of its fees, for whatever reason. One way to address this issue is for the broker’s agreement to stipulate that, if the company suffers any losses due to a Referral Client Dispute, the amount of any commissions previously delivered to the broker in connection with that referral client can be deducted from future commission payments (and reimbursed to your company).
Depending on the nature of your business and your particular concerns, you can choose to include any number of provisions in your broker agreement addressing issues such as confidentiality, non-competition, non-solicitation, non-disparagement, and so forth. See Nolo’s discussions of these topics in How to Protect Your Company’s Goodwill in an Employment Separation Agreement and How to Protect Company Property in an Employee Separation Agreement. Note that although these articles relate to employee terminations, the descriptions of these topics and their importance can just as equally be applied to your boilerplate broker’s agreement.
Furthermore, your agreement should impose monetary penalties or other ramifications in the event that the broker breaches any of the abovementioned provisions, including possible legal action or the forfeiture of past or future commission payments.
A non-circumvention provision is one that’s invoked by a transaction intermediary in order to ensure continued compensation for putting two parties together. In this context, the broker is the intermediary. From your company’s perspective, there usually is no reason to include a non-circumvention provision in your boilerplate document. However, a broker might request that one be inserted so that your company and the referral party do not collude to work together at the exclusion (and non-payment) of the broker.
Assuming that you don’t intend to unethically bypass your broker, the inclusion of a non-circumvention provision is acceptable so long as you’re comfortable that your company’s actions won’t accidentally breach the provision. For example, the non-circumvention clause should stipulate that your company will only pay commissions in connection with referral parties who were made known to you solely by the broker’s introduction, and not by some other means. Similarly, your company should not be required to pay any commissions in connection with business received from new clients with whom you or your company already had communications or a prior relationship.