Most agreements will include arrangements for either 'indemnity' or 'compensation'.
With an indemnity agreement, you pay an amount reflecting the value of the work the agent has done in building up your sales - for example, the agent's efforts to identify customers and build relationships with them.
With a compensation agreement, you pay an amount reflecting the value of what the agent has done, and the agent's loss of future earnings - for example, future sales to customers who the agent introduced to you.
Depending on how the agreement is drafted, an agent may be entitled to commission on sales made after the relationship is terminated, if the agent contributed to winning those sales.
Under UK and European law, self-employed agents are legally entitled to either indemnity or compensation arrangements. If an indemnity is agreed, it can be limited to one year's average earnings, but agreeing an indemnity payment will not necessarily rule out the possibility of the agent claiming compensation as well.
Compensation payments are calculated by reference to the value of the agency if it had continued - ie the agent's prospect of earning future commissions from it. The way in which this future income stream is valued is by looking at the amount a hypothetical purchaser of the agency would pay for it, eg by reference to the potential net earnings that the purchaser could generate, and whether income from it was increasing or decreasing. So a successful agent, acting on behalf of a successful business, may be entitled to significant compensation, while an unsuccessful agent acting on behalf of a business that has ceased trading will be entitle to very little - nothing at all in some circumstances. The old rule that an agent's compensation payment should be roughly two years gross average commission is now obsolete.
If you terminate the relationship because the agent defaulted on the agreement, then compensation is not due. For self-employed agents, however, you will be required to pay compensation or an indemnity unless the agent was guilty of gross misconduct. If the agent is self-employed, you will be required to pay an indemnity or compensation even if the agent dies or retires.
The statutory provisions are complex, and cannot be contracted out of, so legal advice should be sought both at the time of drafting the agreement and when calculating or agreeing any such payments.
