We have a dominant supplier who provides eighty percent of our raw materials, and we have no formal contract with them. Our exit advisor says this is a major vulnerability. How do we mitigate this vendor concentration risk on our transition runway without damaging our supply chain stability?

Question

Tyler Smith · Accepted Answer

Just as customer concentration is a major red flag for buyers, vendor concentration risk can severely impact your valuation. If your business is dependent on a single supplier for critical raw materials or technology without a formal, transferable contract, a buyer will see a fragile supply chain.

To mitigate this risk on your transition runway, you must take a systematic approach to diversifying your options. Start by identifying alternative vendors for your key materials or services.

Use your quarterly Rocks to research, qualify, and onboard secondary suppliers, even if you only route a small percentage of your volume to them initially. This proves to a buyer that your supply chain is resilient and can survive a sudden disruption.

For your primary supplier relationships, work to transition handshake agreements into formal, long term contracts that include clear transferability clauses.

By formalizing these agreements, you lock in pricing and protect your margins while ensuring the relationship remains stable post transaction.

Addressing vendor concentration makes your business much more robust and easier to run today, while removing a significant hurdle that could otherwise derail your due diligence process later.