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What is the impact of supplier concentration on business value?

Rose Stabler
Profile Picture of Rose Stabler Rose is President of Certified Business Brokers. She has 25 years of business experience from serving in management and consulting positions in the Oil Gas, Biotechnology, and Manufacturing industries to working for private equity giant Forstmann Little & Company in the 1980's during the height of the LBO era. As an entrepreneur, she started and built an online promotional product firm that featured her own line of items of original concept and new to the marketplace, and sold the company 12 years later to a corporate acquirer.  Full Bio
Q:I understand the risk of have revenue generated from a few customers. What is the impact of supplier concentration on business value?
A:Concentration in the acquisition world is a bad word. Businesses with high supplier concentration attract fewer buyers and this lowers the price. What’s too high? Having a supplier with 40% of your business is too high. Diversify if at all possible.

When buyers look at a company for sale, they look at risk. Supplier concentration is one of the top risk factors that are examined.

Why? Because if customers push the throttle, the suppliers furnish the gas. A company cannot sell its products to customers if it cannot secure what it needs from suppliers. Any adverse change in a company’s relationships with its key suppliers, or loss of the supply of one of the company’s key products, could have an adverse effect on the business. Therefore, the nature and stability of suppliers is an important consideration in identifying a company’s risk.

There’s a tendency for small business owners to find a good supplier to rely on for the bulk of their material or product needs. If you find someone reliable, why not make your life easier and stick with a trusted entity, right? Not so much when you’re trying to sell your business. Buyers buy to grow the business, not to keep the status quo. So, as a business grows, the importance of the supplier factor becomes even more critical. Growth can be significantly hindered or halted altogether for lack of available resources.

So, what would you do if your main supplier went out of business or had some kind of disaster that strangled output? What if the supplier requests a large cost increase that you cannot mitigate? What if they sold to one of your competitors? How fast could you get new products and materials? And, at what cost? These are questions buyers would ask. So, if you are considering the sale of your business, you can either develop additional supplier relationships in preparation of selling your business later, or sell now and accept a lower price.

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