Selling a Business That Depends on One Supplier
How buyers price the risk of a single supplier, what to document, how to talk to the supplier, and ways to reduce the discount before you sell.
Words by
Matan Michael
Plenty of good businesses buy most of what they sell from one place. A distributor carries one manufacturer's line. A restaurant group buys its proteins from a single purveyor. A contractor sources nearly all its material from one yard that gives a good contract price. The arrangement is efficient, it often took years to build, and an owner stops noticing it. A buyer notices it in the first hour, and from that point a good part of the negotiation will be about it.
What the buyer sees that you do not
When you have worked with a supplier for fifteen years, the relationship feels like part of the business. You know the sales rep, you get a call when something is short, and you have never had a serious problem. A buyer reads the same facts differently. They see a business whose cost of goods, delivery schedule and product line are set by a third party who owes them nothing. If that third party doubles the price, drops the line, sells direct, or simply stops answering the phone, the buyer's earnings change and they have no say.
Buyers and their lenders think about this as a risk that sits outside the company. Customer problems can often be fixed by selling harder. Employee problems can be fixed by hiring. A supplier problem can sometimes only be fixed by finding a different supplier, which may not exist or may cost more. A lender will notice that too, and an SBA lender in particular asks about concentration of any kind in its underwriting. The customer concentration post covers the same instinct on the sales side, and supplier concentration gets much the same treatment, with a discount in the price or a larger share of the price held back.
How much weight it carries depends on how replaceable the supplier is. A commodity item sold by many wholesalers is a small worry. An exclusive territory granted by a manufacturer is a large worry, and also frequently a large asset. The same supplier can be either one depending on what the paper says.
Read your own paper first
Before a buyer reads your supplier agreements, read them yourself. Many owners find that the agreement is shorter or older than they remembered, or that nothing was ever signed. A handshake arrangement that has worked for twenty years is fine for the owner and a problem for the sale, because nothing in it says that the buyer will receive the same pricing.
Look for the term and the renewal mechanics. Look for whether the agreement can be assigned to a buyer or whether it ends when ownership changes, and whether the supplier has to consent. Look for exclusivity in either direction, since some agreements promise you a territory and some promise the supplier that you will buy only from them. Look for minimum purchase commitments, price adjustment language, rebates, and what happens to credit terms. Rules on assignment vary by contract and by state, and your attorney confirms what applies to yours.
Then look at the numbers underneath. If you receive volume rebates, early payment discounts or special pricing that came from your personal relationship, a buyer will test whether those survive the sale. Say so up front. If the pricing is tied to your volume, show the volume. If it is tied to you personally, you will need to talk to the supplier before the buyer does.
Whether to tell the supplier, and when
This is the part owners dread, and it is a fair thing to dread. A supplier who hears that you are selling may get nervous, tighten credit, or start talking to a competitor of yours. A supplier who is told nothing and learns about the sale from a buyer's phone call may feel disrespected and become difficult at exactly the wrong moment.
The usual answer is to wait until the buyer is serious, a letter of intent is signed, and a nondisclosure agreement is in place, and then bring the supplier in on the buyer's schedule and yours. The timing is a judgment call. If the supplier agreement requires consent to assign, the supplier has to be told before closing, and it is generally better that they hear it from you in a calm conversation than in a form letter.
What you say matters. A supplier mostly wants to know that the account will keep buying, will keep paying, and will be run by someone competent. You can offer an introduction to the buyer, describe the buyer's background, and ask what the supplier would need to see to continue on the same terms. Some suppliers will put it in writing, a short letter saying they intend to keep the same pricing and terms with the new owner. That letter is worth more to a buyer than almost anything else you can hand over. Even a conversation that the buyer attends and hears with their own ears will lower the discount in most cases.
Reducing the dependence before you sell
If you have a year or more, you can improve this without changing how the business runs. Find a second source for the products that matter most, even if you only buy a small amount from them. Place orders with the backup supplier on a regular schedule so that the account is open, the credit is approved, and your staff knows how to order. A backup that has never shipped you anything will not impress a buyer, since it has not been tested.
Look at what you can substitute. A restaurant that depends on one fish supplier may have three dishes that could use another species from a different source. A contractor can often qualify a second manufacturer for the material that is not code-critical. A distributor that carries a single brand might add a second line that is not in conflict with the first and sell it alongside. None of these steps removes the dependence, but each one gives the buyer a story about options, and a buyer paying for a business wants a story about options.
Consider also putting the arrangement on paper if it is not. A written agreement with a reasonable term, even one that either side can end on notice, is better than nothing. Ask for it because you are tidying your records for a possible sale of some kind and the supplier will hardly be surprised. A conversation along the lines of wanting to formalize things after many years is common and rarely raises alarm.
How a buyer will price what remains
If dependence is still there when you go to market, expect it to show up in the deal in one of several forms. The buyer may lower the multiple they apply to your earnings, treating the business as riskier than a diversified one. They may ask that a portion of the price be paid later and be tied to the supplier relationship continuing, which means your payment depends on a company you do not control. They may ask for a longer transition period from you so that you can work the relationship yourself for a while. Or they may make the supplier's written consent a condition of closing, which gives them a way out if the supplier hesitates.
Each of these has a cost to you, and they can be compared. A condition of closing delays your payday but leaves the price alone. A deferred payment keeps the price but moves your risk forward. A lower multiple is final. Our post on earnouts, holdbacks and working capital goes through how deferred structures work, and it is worth reading before a buyer proposes one. An owner who knows the supplier is solid will often prefer the deferred structure, since you are being paid later for something you believe will happen anyway.
One more thing buyers check is the supplier's own health. A supplier that is in financial trouble, being acquired, or changing its distribution model is a bigger worry than one that has been stable for decades. If you know something about your supplier's plans, a rumor of consolidation or a new direct sales program, tell your advisor early. Better that it comes from you with a plan than from the buyer's research with an accusation attached.
Special cases where the dependence is the asset
Not every single supplier is a weakness. If you hold an exclusive distribution right for a territory, a licensed product with limited holders, or a long-term supply contract at fixed pricing, that supplier relationship may be the main reason your business is worth what it is. Buyers sometimes pay more for it. In that case the work is the opposite of reducing dependence. You want to show that the right is durable, that it passes to a buyer, and that the supplier has no history of pulling it back.
A franchise or dealer arrangement is a related case, and the supplier there is also the approving party. Those sales have extra steps and different timing, and our post on selling a franchise covers them. The same rule applies to any relationship in which the supplier has a say over who owns you. Treat the supplier as a participant in the deal, and learn early what they will require.
What to do this month
Pull out the supplier agreement, or write down that there is none. Check the term, the assignment language and any exclusivity. Total what you bought from your largest supplier over the last three years and what share of cost of goods it represents, because a buyer will compute that number within the hour. Ask yourself what you would do tomorrow if the supplier raised prices by a large amount, and write the answer down in a paragraph. If that paragraph is short, you have your first project. If it is long and specific, you probably have a better business to sell than you thought, and our guide on how to prepare a business for sale is the next thing to read.
