How do I mitigate risk for an e-commerce retail business with a single manufacturer?

September 21, 2021

by a searcher from National Defense University in Santa Rosa Beach, FL 32459, USA

(UPDATE to clarify the single manufacturer issue) I'm working on the acquisition of an ecommerce business that retails products produced by one manufacturer at one location in China. I'm concerned about a potential supply shortfall if the manufacturer had a fire or other event that disrupted production and/or distribution. I've talked to a couple of business insurance brokers about this and they didn't provide any useful solutions. Building up a large amount of inventory is definitely a way to hedge the risk, but it's obviously costly and ties up cash. Does anyone have experience with this issue and/or advice on how to mitigate the risk of a major supply disruption from a catastrophic event affecting the product manufacturer?

Additional detail: The business is a retail store that carries the same name as the branded product. For analogy purposes, think of something like "Teva-store.com" which would sell Teva products and related gear but couldn't really sell another brand nor go out and hire another manufacturer to produce the product. The brand name is owned by the manufacturer and the ecom store markets and sells the product under license from the manufacturer. Because of this, the ecom business is largely stuck with one manufacturer and one brand (other than the complementing products that can be sold in conjunction with the main brand name product).

Thank you much!

Reply by a searcher
from Texas A&M University in Johnson City, TN, USA

^redacted‌ I have been operating such a business (but not "e") for the last 6 years. Some things not previously brought up:

1. Look at the terms on your inventory buy. Ask for extending terms from say pay before shipping (or whatever you're at) to Net 120 (or something long). Try to carry as much debt with the manufacturer as possible, and this is the most important thing (in my opinion) to gain leverage in an asymmetric relationship. They will be incentivized to keep you going to get paid back. This also addresses your need to build up inventory at the same time. You could also structure this as an inventory loan, reasonable interest rate (in addition to asking for better terms). Such things should help with WC too.

2. Since you indicated in response to ^redacted‌ that manufacturer could not be bought (this was good idea), how about instead taking on investment from the manufacturer?

3. Since brand is owner by Chinese manufacturer, is there anything that you can pivot to with this? Do you get a nice customer list that could be used to immediately have synergy in developing/sourcing/selling a related product? If customer list is valuable enough, I can understand your interest.

4. In addition to above, will seller help de-risk in significant way? 50%+ seller note, low multiple, etc?

5. Why does seller not just sell to the manufacturer?

Reply by a searcher
from Harvard University in Philadelphia, PA, USA

Awesome to read everyone's comments. To me this supply chain risk locked in to one manufacturer AND a single brand is a total deal breaker. Puts you over a barrel on too many fronts, ESPECIALLY now with pandemic supply chain issues leveling companies that do not even have these issues. Also the risk is in no way just about the factory burning down or facing other catastrophic losses. They can raise pricing and you have no recourse/alternative options, have items in the line that simply don't sell (ALL brands have this --will they share in the cost of markdowns or are you hung? Will they refill the hot items for you preferentially over other distributors who are also chasing the best sellers?), The ONLY way I would remotely consider this would be as a bolt on to a much larger business that already has existing relationships with other factories that could be relied upon if this one blew up. There are PLENTY of deals to be had, "deal heat" is hard to see when you are the one in it (ie trying to work around fatal flaws because it is the best or only deal on the table -- trust me we have all done it!). Doesn't mean you can't get lucky and never face these issues, but why bother? I would fall out of love with this one and move on, unless there is some kind of deal structure I cannot imagine that will protect you. Good luck!

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