Why it matters
Customer concentration gets most of the attention, but the supply side can do as much damage. If one factory makes every product you sell, one wholesaler holds the distribution rights, or one software platform runs the whole operation, that supplier has a great deal of power over your margin and your ability to keep trading.
A single source can raise prices, increase minimum order quantities, lengthen lead times, fail, or decide to sell direct to your customers. A fire, a quality failure, new trade restrictions or shipping delays can stop supply for weeks. For an ecommerce brand built on one bestselling product from one factory, a missed production run can mean empty listings, lost rankings and months of recovery.
It also matters whether the relationship survives the sale. Supply and distribution agreements sometimes let the supplier end them on a change of control, and informal arrangements rest on the supplier's goodwill towards the current owner. Ownership is another trap: if the factory owns the moulds, tooling or specifications, switching may mean starting again.
Loupe's valuation tool treats dependence on a single platform, channel or supplier as a quality risk. At its starting settings it reduces the multiple by 10% where one source accounts for more than 50% of revenue or supply, and by 20% above 80%. In a real deal the right discount depends on how quickly, and at what cost, you could move to an alternative. Some buyers ask the seller to qualify a second supplier before completion, or tie part of the price to supply continuing on similar terms.
Customer concentration describes how much of a business's revenue comes from a small number of customers. The higher it is, the more the business depends on decisions it does not control.
A change of control clause gives the other party to a contract rights if the business changes owner, such as the right to terminate, renegotiate or refuse consent.
Goodwill is the part of a purchase price above the value of a business's identifiable assets, less its liabilities. It reflects things like reputation, customer relationships and trained staff.
How to spot it
- The listing mentions a trusted manufacturing partner or exclusive supplier but no alternatives.
- The purchase ledger shows one supplier accounting for most of the cost of goods sold.
- The moulds, tooling or product specifications belong to the manufacturer.
- There is no written supply agreement, or the agreement is short and ends soon.
- Gross margin has moved sharply after supplier price changes.
- The business runs on one hosting provider, payment processor or core software tool with no tested fallback.
- Stock-outs show up in sales data, order delays or customer reviews.
Gross margin is revenue minus the direct cost of what a business sells, shown as a percentage of revenue. It shows how much each sale contributes towards overheads and profit.
Questions to ask the seller
- Which suppliers would stop the business trading if they disappeared tomorrow?
- Who owns the product designs, specifications, moulds and tooling?
- Have you tested a second supplier, and what would switching cost and how long would it take?
- Is there a written agreement, and does it let the supplier end it if the business is sold?
- How have prices, lead times and minimum order quantities changed over the last three years?
- Does the supplier sell the same or similar products to your competitors or direct to consumers?
Documents to request
- Purchases by supplier for the last three years
- Supply, manufacturing, distribution and software agreements, including exclusivity and change of control terms
- Price lists and correspondence about price increases
- Quality records, defect reports and details of any product recalls
- Evidence of who owns designs, moulds and tooling
- Quotes, samples or trial orders from alternative suppliers, if any exist
An exclusivity period is an agreed time during which the seller will not negotiate with other buyers, giving you room to complete due diligence and arrange finance.