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Annual Renewal

A convenient clause that benefits both parties to a representative agreement calls for automatic termination at the end of the first full calendar year of the sales relationship and every year thereafter. The clause calls for a spontaneous one-year renewal unless either party serves notice of its intent not to renew the agreement. The benefit to such an arrangement is twofold: First, an annual renewal clause forces both parties to review the contract and to consider whether it should be renewed. This forces both parties to ask themselves annually whether they are doing all they should for their partners. Both parties have an opportunity to determine whether their partners are doing everything that is expected of them.

Second, an annual renewal clause gives both parties the opportunity to terminate the agreement with relatively little effort. Without an annual renewal clause, a sales partner that is dissatisfied would invoke a termination for convenience clause. With an annual renewal clause, that same dissatisfied sales partner could wait until 60 days prior to the end of the current agreement and issue a notice of intent not to renew the agreement. In the former case, the terminated partner may be surprised and, as a result, may strenuously object. In the latter case, the terminated partner would be less surprised and would likely object less strenuously. Less energy applied to objecting to a letter of termination reduces the likelihood of litigation upon termination.


What Happens after Termination?

Representative agreements must spell out responsibilities of both parties during and after the life of the agreement. All suppliers and manufacturers’ representatives understand that responsibilities of the parties must be defined during the period that the agreement is operational. Fewer truly understand that responsibilities must be spelled out for the period after termination. A reliable agreement clearly states the responsibilities and obligations of both parties during the life of the agreement, upon notice of termination, and after the agreement is terminated officially. That agreement must detail the length of time between notice of termination and the effective date of termination. Failure here is frequently an avoidable source of litigation upon unwinding rep agreements.


Due Diligence

A frequent source of dissatisfaction with sales performance in a representative relationship is inadequate due diligence before the representative agreement is signed. This cause and outcome is completely preventable by performing rigorous due diligence. Good performance in a rep relationship never begins immediately; it frequently takes years. For a supplier, due diligence means holding rigorous conversations or interviews with many customers. The list of those customers should represent a wide assortment of large and small customers in various market segments. Inputs from the most important customers should be given the greatest weight. Where sales through distribution are significant, a majority of the distributors must be interviewed. The value of the collective information gathered from an array of customers and distributors far exceeds that of the presentations from the candidate representatives.

For a manufacturers’ representative, due diligence includes interviewing customers and reps of the candidate supplier in other territories. Does the supplier provide adequate sales training, engineering and product support, customer service, product quality and on-time delivery? Is the supplier’s product complementary to other suppliers on the line card? Will signing with the candidate supplier automatically trigger conflict or termination of other suppliers on the line card?

Performing rigorous due diligence of a sales partner does not prevent dissatisfaction and potential disengagement of a representative relationship. However, absence of adequate due diligence is too often the root cause of growing dissatisfaction, poor sales and profitability, and ultimately, expiration of a rep relationship. Always ensure that the race to sign a new partner does not preclude proper due diligence.


Maintaining Balance

Balance in a sales agreement is important because absence of balance often leads to suspicion and the unwinding of a relationship between a supplier and its manufacturers’ representative. A rep that feels that its power in a representative relationship is undercut by an out-of-balance agreement often begins to focus incremental resources on alternate suppliers. A supplier that feels that its position is threatened by an agreement that favors the rep often shifts resources to other reps or territories. Whenever resources are directed away from a particular partner, the relationship with that partner becomes weaker. Sales performance deteriorates. Suspicion grows. The cycle continues until overall performance declines to an intolerable level and termination becomes the only remedy.

Obstacles to a strong relationship between a supplier and its manufacturers’ representative occur naturally. Maintaining and developing a strong relationship between sales partners requires hard work by both parties. Allowing suspicion to develop in the relationship because of an imbalanced agreement is avoidable. Care should be taken when a rep agreement is drafted to ensure that the agreement favors disproportionately neither the supplier nor the rep.


Conclusion

Representative agreements are an integral tool in the construction of a relationship between suppliers and manufacturers’ representatives. A well-written agreement can assist in developing that relationship. An agreement cannot extend the life of a relationship once the relationship expires. A poorly written agreement often leads to a legal quarrel that in turn needlessly consumes management time and financial resources. Seasoned partners to rep agreements generally insist upon the clauses and ideas discussed above. Less experienced partners more frequently avoid some of these same clauses and ideas when drafting agreements. Rep agreements that contain these clauses and ideas that are written in a balanced fashion tend to survive longer than those that do not. Balanced agreements encourage both parties to apply energy to the sales relationship. A well-written agreement can eliminate expenditure of resources on unproductive activities and encourage the parties to go about their respective business upon expiration of the relationship.

Glen Balzer, president of New Era Consulting, is a management and forensic consultant involved with domestic and international marketing and sales. He advises parties involved with contracts between suppliers, manufacturers’ representatives, global customers, and industrial distributors. He has significant experience with integration and rationalization of merged and acquired companies. For over 30 years, he has been involved in all aspects of establishing and managing marketing and sales organizations throughout America, Europe, and Asia. Contact him through his website: www.neweraconsulting.com.