Vendor Concentration

The Vendor Concentration Risk

A business that sources 70% of its product from one supplier, or uses an exclusive distributor for a key product line, faces material risk if:

• The supplier changes pricing post-acquisition (no more relationship-based pricing)
• The supplier has an existing relationship with the seller personally and doesn't extend the same terms to the buyer
• The supplier is also a competitor or contemplating vertical integration
• The supplier's business faces its own disruption

Types of Vendor Risk

Single-source inputs: A business that has only one available supplier for a critical component — because alternatives don't exist, or because switching costs are prohibitive.

Exclusive distribution agreements: A dealer or reseller with exclusivity for a brand or product line. Exclusivity agreements often have renewal terms and may not transfer automatically.

Preferred pricing arrangements: Volume pricing or preferential rates based on a long-standing relationship. New ownership may restart the relationship at standard rates.

Technology platforms: When the business runs on a SaaS platform, licensed software, or a proprietary system they don't own, the vendor is effectively a critical supplier.

Due Diligence Questions

• What percentage of COGS comes from the top 3 suppliers?
• Are any inputs single-source?
• Are supplier relationships contractual or relationship-based?
• Do any supplier agreements have change-of-control provisions that allow the supplier to renegotiate?
• Has the buyer spoken directly with key suppliers about the transition?