Diligence tactics when the seller will be a supplier

July 24, 2023

by a searcher from Indiana University at Bloomington in Washington, DC, USA

I'm a self-funded searcher that just went under LOI for a distribution company. ~10% of revenue comes from products manufactured by a second company (a) that is owned by the seller and his brother, and (b) at which the seller will have some day-to-day responsibilities post-close.

Have others run into similar situations and if so, how have you approached diligence for this dynamic? I know to look for things like preferential pricing, past/current contracts, dig deep for seller motivation. But other suggestions and real-world experience would be great to hear, in comments or DMs. Thanks!

Reply by a searcher
from Southwestern University in Houston, TX, USA

One of the things I dig particularly deep for in these scenarios is where are the shared costs? It's hard to keep two related businesses separate and most owners don't even try. So you've got to know where the acquisition is footing cost for the supplier and vice versa.

I would also make whatever pricing has been in place up until now the basis for an ongoing agreement. And put it in the sales contract.

Reply by a searcher
in Cyprus

I would try to get the current product pricing fixed as long as possible, and make a good contract that covers how they can raise the prices when you own the disctribution company. Also +1 on what Mamta said, try to get the seller involved in the future success of the business aswell.

+2 more replies.

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