How I Evaluate Supplier Dependence in Acquisitions

When I buy a business, one of the most important external risks I look at is supplier dependence. Over the years, I’ve learned that too much reliance on one or two suppliers can put an otherwise strong company in jeopardy. A vendor issue, whether it’s a price increase, delivery delay, or sudden contract change, can ripple through operations, frustrate customers, and eat away at profitability.

Supplier dependence often hides in plain sight. On the surface, everything looks fine: inventory is stocked, costs are predictable, and operations run smoothly. But if all of that stability rests on a single vendor relationship, then the business is fragile. That’s why I treat supplier analysis as one of the core parts of due diligence.

Why Supplier Dependence Matters

Supplier dependence matters because it impacts:

• Pricing stability and margin resilience
• Product availability and reliability
• Negotiating power with vendors
• Customer satisfaction through consistent service delivery
• Long-term scalability

If one supplier controls too much of the company’s fate, then ownership transfer becomes risky.

My Early Mistakes

In one acquisition, I overlooked supplier concentration. A single vendor provided 80% of raw materials. Six months after closing, that supplier increased prices by 15%. Margins collapsed.

In another deal, I underestimated how fragile logistics were. The business had only one shipping partner, and when they faced capacity issues, customer orders backed up.

Both experiences reinforced that supply chains can be just as fragile as customer bases.

How I Evaluate Supplier Risk

During diligence, I ask:

• What percentage of materials or services come from the top supplier?
• Are there contracts, or is it handshake-based?
• Are vendor terms tied to the seller personally or to the business?
• Are there alternative suppliers available?
• How stable are the vendor’s own operations and finances?

Signs of High Supplier Risk

• One supplier accounts for over 40% of the spend
• No contracts securing pricing or service levels
• Vendor loyalty is tied personally to the seller
• Few alternatives in the market
• History of delays, quality issues, or sudden price changes

Signs of Low Supplier Risk

• Multiple vendors are available for each critical input
• Written contracts with favorable terms
• Stable vendor history and financial strength
• Relationships spread across a team, not just the owner
• Ability to switch vendors quickly if needed

How I Protect Myself

When I see supplier dependence, I adjust deal terms. I may:

• Negotiate a lower valuation or seller financing
• Require contracts to be secured before closing
• Build contingency plans with alternative suppliers
• Hold reserves in case of sudden cost increases

How I Strengthen Supply Chains Post-Acquisition

After buying a business, I:

• Diversify vendor relationships immediately
• Negotiate volume discounts across multiple suppliers
• Invest in systems that monitor inventory and logistics
• Build trust with vendors through timely payments and transparency

Supplier diversification is just as important as customer diversification.

Why Supplier Dependence Impacts Valuation

Businesses with balanced supplier relationships are worth more. Buyers like me discount companies where one vendor holds too much power.

Final Thoughts

I’ve learned that supplier dependence is one of the most overlooked risks in small business acquisitions. That’s why I analyze vendor concentration, protect myself in deal structure, and diversify quickly post-closing.

Because in the end, businesses don’t run on spreadsheets, they run on supply chains. And those chains are only as strong as their weakest link.

I continue sharing my acquisition strategies and lessons at DrConnorRobertson.com, where I break down the details that make deals durable.