Manufacturers’ representatives work hard to create customer relationships, develop and expand those relationships and grow the importance of their customers to their suppliers. That hard work usually ensures a long-term relationship. However, it is not appropriate to believe that the relationship will last forever. All relationships ultimately come to an end. The importance of both parties to each other is the only factor that leads to a long-term relationship. The words in a representative agreement rarely prevent or postpone the end from coming. The agreement should not be used as a tool to ensure a long relationship.
One technique that has proven valuable to both manufacturers and manufacturers’ representatives is the insertion of language in the representative agreement that calls for annual renewal of the agreement. The most typical clause includes words that say, “the agreement shall be in effect until such-and-such a date, (usually the end of the first calendar year in which the agreement was signed) and shall be automatically renewed for an additional one year period thereafter unless terminated by written notice from either party to the other not less than 30 days prior to the end of the initial or any subsequent one-year term.”
Insertion of a simple annual renewal clause accomplishes a number of objectives. First, the annual renewal clause forces both the supplier and the representative to review the terms and conditions of that agreement at least once each year. If there are terms or conditions in the agreement that are unpleasant to one of the parties, that party might spend time during the year to discuss a change with the other party during the middle of the year, when neither party is up against a deadline for printing and signing a new agreement. When minor changes are proposed by both parties during the middle of the year, neither party feels compelled to make a decision under the duress of the calendar.
Second, when the representative agreement includes an annual renewal clause, both parties are forced to evaluate the relationship at least once per year. Too often, the relationship is not critically evaluated frequently and it’s allowed to languish until something catastrophic happens. When that occurs, there is usually a shopping list of problems in the mind of both parties. Repair of the relationship is difficult when both parties carry around that shopping list. The annual renewal clause forces the frequent evaluation of the relationship and individual problems can be addressed one at a time.
Third, another benefit of an annual renewal clause is that the supplier has an opportunity to rank all the manufacturers representatives in the rep network. Such a forced ranking brings into focus the relative performance of each manufacturers’ representative. When this is done, little corrective action needs to be taken with the top performers; moderate corrective action needs to be taken with the middle-performers; and termination needs to be considered with the representatives at the bottom of the forced ranking. Simultaneously, when the agreement includes an annual renewal clause, the manufacturers’ representative is forced to evaluate the value of the supplier. If the return on its time is low, relative to the rest of the suppliers on the manufacturers’ representative’s line card, a decision must be made whether to continue the relationship. The annual renewal clause affords both parties the opportunity to terminate the relationship without stating or demonstrating cause.
The annual renewal provision is a proven technique that presents problems from growing out of control. And, when the relationship between a manufacturer and manufacturers’ representative approaches the end of life, the same clause provides a relatively painless method of termination. Don’t sign a new agreement without an annual renewal clause.