Sales Agency Agreement: Everything You Need to Know
A sales agency agreement defines what the terms are when a sales agent acts as an independent contractor for a company.3 min read
A sales agency agreement defines what the terms are when a sales agent acts as an independent contractor for a company. They will promote the company's services or products in exchange for the commission on each sale that comes through. This contract is very similar to a general independent contractor agreement. It establishes that the sales agent isn't a co-owner, employee, or officer of the company. Commissions will depend on how many sales the agent has during each pay period.
Terms of a Sales Agency Agreement
The contract lists what services or products the sale's agent will market. A section of it will list what actions will result in the contract being terminated. If the agent needs to maintain a permit or license to complete their sales, the agreement will discuss the conditions for the permit or license renewals. Even if the sales agent is an independent contractor, the agent may still be required by the contract to commit to a certain sales quota within a set amount of time. The agent needs to reach their quota in order to keep their status with the company.
There may be other requirements in the contract, such as the sale agent being obligated to maintain a vehicle or finish training. The agreement may require the sales agent to compensate the company if they take any actions to cause damages. Many companies have certain territories that are within a thinly defined target market. The contract may state that each sale needs to be prepared within a specific geographic area, which limits how many sales can be done in a specific region.
The contract may also restrict the agent to selling only to a certain segment of customers. It varies depending on the type of promotional work and marketing, but every agent might have exclusive territory. When a sale happens, the sale agent gets a commission, which is a certain percentage of the sale total. This is only complete when the business gets paid from the sale or invoices their customer. The agent is in charge of defining the structure of the commission, including the formula for the commission.
An agency agreement is created when an agent is authorized by another person, known as the principal, to act on their behalf. The principal that assigns the agency if forming a legal relationship with that agent. It's crucial for companies to understand agency agreements because they'll be encountered when an accountant, vendor, or lawyer is asked to do business on behalf of someone else. There are also many advantages to agency agreements, particularly when a principal is the owner of a small business.
Most people don't have all the skills necessary to run a business, so it's smart to ask someone to be an agent on the company's behalf. There are several reasons it's helpful:
- Saves the business time
- Helps them perform business in a way that's more efficient
- Can outsource human resources duties
Sometimes an agency agreement comes out of necessity. If the company is facing a legal matter, it will be necessary to have an attorney who's qualified to represent the business. Hiring an attorney allows them to work on the company's behalf.
There can be disadvantages to having an agency agreement as well. The main problem is that the principal may be held liable for possible misconduct on behalf of the agent. If the agent does something illegal or makes a mistake while they're representing the principal, the principal may be liable and considered to have committed the act. As an example, if the agent signs a contract on behalf of the business and the contract hasn't been thoroughly read by the principal, they can be held liable for any terms and conditions of the contract.
The principal is the one who authorizes all the acts of the agent and is, therefore, the one held responsible. The terms and conditions should always be clear in an agency agreement so that both the agent and principal understand them. There should be specific language to limit the principal's liability if something is done by the agent that wasn't authorized.
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