Top 20 Destroyers of Business Value Tip # 20 – Over Reliance on a Single or Major Supplier

Posted on April 4, 2013 · Posted in Blog

Paper

An often overlooked destroyer of value is the excessive reliance on a major supplier. While maintaining a good relationship with a major supplier is valuable, the associated risks can impact the value of a business.

For example, a printing company with a long standing relationship with a local paper supplier could be at risk if they are overly dependent upon the supplier.  Say the owners have become good friends and supported each other’s causes.   The printing company may give the majority of its business to the supplier and in return get favorable terms including pricing and delivery of popular lines.

If another paper company buys out the paper supplier, the printing company will no longer have the “intangible relationship.”   As a result, prices and allocation will no longer be based on the relationship and prices may go up.  The increased paper costs and reduced allocation of popular items would significantly impact the value of the printing company.

These unforeseen supplier risks are out of a business owner’s control.  However, there are steps owners can take to mitigate single or major supplier reliance. These include having multiple suppliers, long-term contracts and back up sources.

Supplier relationships are an integral part of a business valuation and buyer due diligence.    Dependence on suppliers will not get missed by an outside valuator or purchaser.

Is your business’ value being destroyed by being over reliant on a single or major supplier?

 

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