What is supplier concentration risk?

Concentration risk is usually discussed from the revenue side: what happens if the biggest customer leaves. The supply side can be the sharper exposure, because a business without customers is unprofitable while a business without stock is closed.

Where it actually bites

Exclusive distribution agreements are the clearest case — the business has the right to sell a brand in a territory, that right is the business, and it may not survive a change of ownership. Beyond that: a sole manufacturer of a component, a supplier offering credit terms nobody else will match, or a specialised input with months of qualification before an alternative is approved.

Supply contracts may not transfer

This is the part buyers discover late. Supply and distribution agreements commonly require the supplier’s consent to assignment, and in an asset sale they do not move without it. A buyer can close on a business whose central supplier relationship has quietly not come with it. Read the assignment provisions in every material supply contract during diligence, not after.

Pricing and terms are part of the risk

Long-standing owners often hold informal pricing or credit terms earned over years of relationship. Those are not contractual and they do not transfer. Ask what the terms are in writing, and model the business at standard terms rather than at the ones the departing owner negotiated personally.

What to ask for

Purchases by supplier for the last two or three years, so the concentration is a measured share rather than an impression; every material supply agreement including its assignment clause; and confirmation from the supplier itself, where the seller permits the contact, that it intends to continue with the new owner.