Lender recognized mitigations for supplier concentration?

October 04, 2022

by a searcher from Harvard University - Harvard Business School in Miami, FL, USA

I'm interested in niche mfg'ing opportunity. Solid margins, no material customer concentrations, nice growth prospects...

The challenge with this one is supplier concentration. Due to the specialized nature of the company's inputs, the supply base is concentrated to 1 international distributor sourcing from a small number of vendors (<5).

Has anyone had success helping lenders understand and approve mitigations to supplier concentration? Things like long-term supply agreements (LTSAs), regional exclusivity contracts, or other mitigation strategies to demonstrate post-transaction supply continuity?

Reply by a searcher
from University of Illinois at Urbana in Downers Grove, IL, USA

I'd like to bump this as I'm looking at a similar opportunity (supplier concentration of ~90% via operating as a dealer/installer/service provider with defined territories for high margin, moated product) - a good fit for my investment thesis with significant upside, but hair on it in the guise of what happens if the supplier goes out of business / sells / etc. Doesn't matter and it has good upside after a few years if model is correct. But... before that, existential risks... Vendor financing does not seems to be feasible in this situation. SBA unlikely, unless I'm wrong. Purchase price 6-7M range, a little bigger than SBA anyway.

Seller has the real issue here, but I also see an opportunity if I could find the right structure.

Does anyone have additional insights outside of 100% seller financing (the dream)? Open to ideas. redacted

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

We have some experience with this. We are a commercial loan brokerage shop with over 350 funding partners. I would be more than happy to connect at redacted Thank you.

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