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Holmes, How … Do I Negotiate a Broker Representation Agreement?

small business contract broker agreement

A strong sales program is central to the success of most businesses. However, even an accomplished sales team may be augmented by a broker with a specific set of skills, contacts, and/or licenses. When engaging a broker, be careful to precisely define the relationship, its scope, term, and compensation structure to ensure that you receive the desired value. Let’s get started.

1. All in? One of the first considerations in working with a broker is the scope of representation. Are they deputized to sell all of your products and/or services, or just some? Do they have representation rights in a limited geographic region, or may they sell everywhere? Will you work with this broker exclusively, or have other sales representatives? Unless you have a strong knowledge of the broker’s abilities, it may be wise to grant a “test” field of representation, so that you can evaluate their abilities before granting broad-scope exclusivity. Moreover, even when granting a broker certain exclusivities, you may want to retain the right to make your own direct sales that were not generated by the broker, without a fee obligation. And, for assurance in the event that things don't work out, include a finite term for the agreement so that there’s a chance for everyone to reevaluate the value of the relationship. That term will vary depending upon what's a reasonable timeframe to generate target sales in your industry.

2. Employee, Agent or Neither? Typically, the business goal is to treat a broker as an independent contractor, rather than an employee. The IRS offers guidance on this, which you can review here. For greater clarification, the independent contractor relationship can be reinforced with explicit contract language indicating that the broker is not your employee, and as such, you will neither assume the privileges, nor the responsibilities, of an employer. So for example, you will not provide the broker with health insurance benefits, nor will you withhold taxes that are due to governmental agencies for employees. Similarly, your agreement may clarify that you will not control the broker’s activities in the same way that you may for an employee. For instance, you do not set the broker’s hours or provide them with transportation for sales calls. Likewise, it’s prudent to clarify in your agreement that the broker is not your agent, and therefore cannot bind you to any contract with a third party, such as a customer. That way, you maintain control over the terms of your agreements and product/service commitments.

3. What Will it Cost? Set the broker’s compensation structure up front. Will they be paid a flat fee per order, or a commission based upon a percentage of sales revenue? What if a customer receives discounts or makes returns? Is that deducted from the broker’s commission calculation? When is the broker’s fee due – before or after the customer’s payment? (On a related note, who handles disputes with customers if they don’t timely pay for their orders? If the broker has the customer relationship, you may want their help with a resolution.) Be aware that brokers may request an audit right to ensure that they are being paid appropriately. This is often a reasonable request, although there may be some negotiation as to who bears that audit cost.

Clarifying the scope of representation, independent contractor relationship and commission structures will help avoid disputes with your broker in the future. In addition, be mindful that your broker may learn important information about your business that provides a competitive advantage, such as pricing and profitability margins, customer lists, financial targets and/or expansion plans. All of these may be trade secrets, which should be protected through confidentiality and non-disclosure agreements. Likewise, you may wish to include non-solicitation terms in your contract to discourage the broker from enlisting your employees to enjoy greener grass outside of your pastures.

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JoAnn Holmes ("Jo") is the founder of HOLMES@LAW, LLC. She serves as Outside General Counsel to select, intimate management teams for midsize companies. Likewise, Jo provides strategic support for lean law departments.

Jo founded HOLMES@LAW to provide agile, result-driven legal solutions. Beyond risk management, we help identify opportunities. The firm's focus areas are business law and strategy, commercial contracts and global intellectual property management. We build long-term relationships as trusted collaborators, and our flexibility consistently yields great value for clients.

HOLMES@LAW is also committed to service work, including through supporting local schools and leadership groups, as well as domestic and international charities. Since its founding, the firm has dedicated more than 200 hours to community service.

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Holmes, How … about the Disclaimers?

Information shared by JoAnn Holmes and/or HOLMES@LAW, LLC ("We or Us") is for educational purposes only. It is not legal advice. Each situation is unique, so the information We share may not be relevant to your circumstance. Until you enter a formal engagement agreement with Us, We are not your legal counsel, and no attorney-client relationship exists. So, please do not share any confidential information with Us, and please only interact with Us if you agree to these ground rules. Thanks!

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