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Im reviewing a contract to be an independent contractor to…

I'm reviewing a contract to...
I'm reviewing a contract to be an independent contractor to market a product, There is no fee or buy in for the opportunity and I get a protected territory. The business builds over lots of time, 3 years to a good income level and there are residuals paid for each customer that was procured during the contract period which has no time limit. Once business starts to come in it should grow exponentially, the opportunity is presented as an asset and can be sold or assigned. So it's like my own business. Question is there is a termination clause for any or no reason and also a clause for cause, it seems to me I could build the business to a good income level and then they could terminate for no reason where I would still receive residuals for whomever signed up while I had the contract but future business would just become house business for the company and they won't have to pay me forthe momentum of what I built. Is this just a standard in contracts and I shouldn't be concerned?
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1/5/2013
socrateaser
socrateaser, Lawyer
Category: Legal
Satisfied Customers: 40,148
Experience: Retired
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Question is there is a termination clause for any or no reason and also a clause for cause, it seems to me I could build the business to a good income level and then they could terminate for no reason where I would still receive residuals for whomever signed up while I had the contract but future business would just become house business for the company and they won't have to pay me for the momentum of what I built. Is this just a standard in contracts and I shouldn't be concerned?

A: It's actually about as "nonstandard" as a contract can get. An "at-will" contract is almost always an attempt to avoid the employment laws by pretending to treat an individual as an independent contractor, even though the state and federal government would almost certainly deem the contract an employment contract.

However, the residual deal is interesting, assuming that it's generous enough. The trouble with such agreements is that once you are cut off from the parent company, trying to audit the books becomes an exercise in futility. You end up having to sue, the business stalls forever, meanwhile you have no revenue stream, so you're out of pocket for your attorney's fees and you could wait for several years for a judgment that you can collect on. Meanwhile the business, which has had similar dealings with other contractors, files for bankruptcy and you find out that the business has been insolvent forever, and you have no means of recovering your attorney's fees and costs of suit.

I'm really not trying to convince you that this is a bad deal -- I really don't know.

What I do know is that most of the time, these deals are only good when you generating current revenue, and the idea that they are a long-term solution is almost always an illusion.

The only way to know that the parent company is solvent enough to do this deal over the long term, is if they give you a surety bond for your likely profits and recalculate the bond, at least annually. And, if you can get the parent company to do that, then you will be the only person who has ever accomplished that, because it means that the parent must have a lot of cash on hand in order to pay its debts -- and, these types of deals just never have that sort of risk protection.

BotXXXXX XXXXXne, if you do the deal, think of it as a job with no future once something goes wrong -- because that's almost certainly what it will turn out to be.

Hope this helps.
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Customer reply replied 5 years ago
Interesting... So lets say this really took off and there was lost of success financially, could they succeed if they terminated for no reason to just take it away and continue to benefit from what I built? The residuals could be a decent amount of money but its 7+ years to build that up. I understand they are protecting themselves if the business doesn't work. I'm willing to take the risk because I believe in the product but would a court really let them terminate contract if it was so many years later and I built the territory to be successful, like they can take the business I built for themselves?
If you have an "at will" contract, then there is nothing to stop them from terminating the deal at will. The residual provision is what would validate the deal for the court, because while you're being cut off from new revenue, you retain the value of the good will you already built, as long as the former customers/clients continue to purchase.

Maybe they won't want to take the business away. But, if for some reason, another "partner" gets bigger, faster than you, and he/she wants your territory, then the parent may consolidate you right out of the deal. That's probably the biggest risk.

Hope this helps.
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Customer reply replied 5 years ago
Is it a correct assumption that in the insurance world this s just the way it is and if its a great company and I succeed that it isn't an issue? Like you said these types of deals don't have risk protection. They claim total transparency and other partners rave about hat a great company it is. So if one territory partner gets a raw deal the others would certainly hear about it, like being consolidated out..l I'd think that would be bad for business.
If this is State Farm, Allstate, Farmers, etc., then they have a history of these types of arrangements, and you know they work for the most part. But, if it's some other company that doesn't have that sort of reputation for independent field offices, then all I can say is "caveat emptor."

Best wishes.
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