Inflexible Supplier Contracts

At the beginning of the pandemic, dealers worked hard to reduce expenses. One strategy was to terminate or renegotiate supplier contracts. Unfortunately, once they reviewed the contracts, dealers saw that often they did not have the ability to do that because the contracts were for a specific long term without the ability to cancel.

Too often, dealer managers sign contracts put before them by suppliers. The managers seldom negotiate the terms. That is a serious mistake. Dealers, as buyers of products and services, have leverage when the supplier wants to do business with them. That leverage disappears once the contract is signed.

There are a number of things you should look for in a supplier contract and we have provided a checklist of terms about which you should be careful in supplier contracts in a prior issue.

There are some to which you should give special attention to now because of lessons learned during the pandemic.

  • What is the duration of the agreement? Why do you need a three-year agreement for a cleaning service, an advertising company, or other service provider? Any contract should be for a 30-day term, or for a longer-term subject to 30-day termination, unless the supplier is investing financially to manage your account.
  • Even when there should be a specific duration, any rollover provision should be month-to-month, not a repeat of the original duration.
  • What is the supplier obligated to give you? There should be performance standards the supplier must meet. During a pandemic, a supplier may lose the ability to provide contracted services, and you should be able to take action when that happens.
  • Beware of hidden personal guarantees. In the signature line for the dealership there may be a short paragraph, and included in that wording is the statement that the signatory for the dealership is personally guaranteeing the debts of the dealership. A dealership should consider if it wants to do business with a company that uses such a tactic.