When prospective buyers start the due diligence process, vendor relationships are one factor they consider in their analysis. Here are a couple of questions they may ask.
How concentrated are the company’s suppliers?
Small companies can have simple handshake agreements with their suppliers since their orders are usually for commodities used in the manufacturing process. Most companies have plenty of options for ordering materials, so if one vendor raises prices or has trouble delivering, they can easily move on to another supplier. Buyers will want to make sure they have several options available to them as well.
A buyer will be concerned when a specific supplier offers prices that are not normal (say, a deep discount because of a personal relationship) and will want to know if pricing will change dramatically when there’s a change of ownership.
In rare cases, the business may buy a component unique to a supplier and hard to get elsewhere. The buyer will want to research this to ensure that they will be able to continue to get this component at a similar price.
How much capacity do the vendors have?
A buyer may have plans for growth and want to know that the suppliers can handle the larger demand. Or, they may already own a company in the industry and are considering consolidating their business; they’ll want to know whether they can leverage higher volume into better pricing or terms. In any case, they will look at pricing trends and terms so they understand the implications for their future purchases.
Buyers will also research the vendor to ensure their financial security and stability; they want to ensure that there is no risk of the company suddenly closing its doors or being unable to deliver the same quality material on time.
Has the company’s supply chain normalized after the pandemic shutdowns?
Most of the issues with supply chains caused by the pandemic have been resolved. However, some business owners accumulated inventory during that period as a precaution and may still be storing and managing those raw materials.
We recommend that sellers optimize their inventory levels as much as possible before putting a company up for sale (whether it’s raw material or manufactured components.) A Buyer will expect to receive “normalized” levels of inventory necessary to run the business as part of the sale. Having additional inventory on hand does not necessarily lead to a higher valuation. The excess inventory may appear necessary for normal operations if it has been showing up on your Balance Sheet every month, and Buyers will typically determine their purchase price based on the business’s overall cash flow. Excess inventory further complicates the valuation and the offer price for any company, especially if some of that inventory is obsolete or is expected to become obsolete in the near future; buyers and sellers may have trouble agreeing on its value. That’s unsurprising because inventory’s value is dynamic rather than static and can fluctuate based on current market rates. Business sale negotiations usually take place weeks or months before the actual closing, so your inventory could be worth considerably less (or in some cases more) than when the buyer made an offer. If inventory is not an issue, most buyers will only be concerned about vendor relationships if they perceive them as a risk to ongoing operations. As long as they have several reliable sources of materials available, a new owner will not base a buying decision on the company’s current vendor relationships.
If I can help you understand how your supply chain may affect your company’s value, I welcome the conversation.
