The strength or weakness of a business’ supplier base will greatly impact on the business’ value. Since contracts establish the rules of the game for the supplier relationship, they are a critical factor in generating value. Does the business have the freedom to choose from a multitude of similar suppliers with similar products and services, or are they tied to one or two key suppliers?
Unfortunately, the management phase of the contracting cycle is often overlooked, as the emphasis is placed more heavily on the front end of the contracting cycle, which involves negotiations and drafting. This is clearly an erroneous oversight because poor contract management will no doubt result in negative financial outcomes and impact negatively on the value of a business.
Below I talk about four factors that all business owners should understand and review on a regular basis with relation to their supplier agreements.
Exclusivity
Exclusivity of a supply contract can have both positive and negative consequences on the value of a business. When a business is tied to one or two key suppliers, with limited opportunity to source goods or services elsewhere an assessment of those supplier’s stability and risks contained within supply agreements is needed in order to determine the impact on the business’ value.
Security of Supply
Ensuring that a business has a secure, reliable and effective supply of goods in imperative to ensure that your customer’s needs are being met and there are not any issues in the supply chain. A supplier with a strong track record of meeting targets and providing you with a first rate product ensures that customers will have confidence that you will be able to meet their needs now and into the future. The value of a business that has secure supply contracts will be positively impacted.
Expirations and Renewals
Contracts have various durations, with some agreements involving a single, finite length and others lasting for years on end. Businesses must be aware of every contract’s expiration date and/or renewal requirements because this will undoubtedly impact the influx of goods and services, as well as the outlay of funds. If a supplier contract expires unbeknownst to the business, this could cause a massive disruption in the entire operation of the business and negatively impact the value of the business.
Breaches
Supplier agreement breaches are the source of countless, costly court battles, most of which could be avoided fairly easily. A supply agreement can be breached in a number of different ways including the supplier not meeting quality standards, time schedules or order quantities. Unfortunately, misaligned goals and miscommunication are often the cause. A strong contract management approach is critical to staying on top of things to avoid the financial ramifications associated with a breach of contract.
Find Out More
At Quinn M&A, our expert team of business merger, acquisition, sale, and valuation advisors can assist with assessing the risks associated with supplier arrangements as part of due diligence exercises and valuation assignments. To schedule, a complimentary meeting with one of our senior staff call us today on 1300 784 667 or submit an express enquiry.
