Customer and supplier dependence in due diligence: concentration risks, contract terms, termination rights and purchase price effects.
BRANDAUER Rechtsanwälte
Salzburg law firm for corporate, company and transaction law
Every transaction is handled by a coordinated team of lawyers, legal staff and specialists. In company acquisition matters we look at structure, contract, tax and liability together.
A business can look profitable on paper and still be vulnerable if a few customers, suppliers or platforms carry most of the business. Such concentration risks often decide purchase price, warranties and closing certainty in an acquisition.
This post explains how customer and supplier dependence is reviewed in due diligence. The focus is on revenue concentration, contract terms, termination rights, exclusivity, price changes and whether relationships depend on individual persons.
The topic complements the general due diligence checklist. That post covers the full review. This one focuses on the economic robustness of market relationships.
Answer two questions on concentration and contract position.
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A concentration risk matters where the loss of individual relationships changes the company value materially.
If revenue and procurement are broadly spread, concentration risk is lower. Still document the main customer and supplier lists so later deviations remain measurable.
A sample review of key contracts and termination rights remains useful.
If concentration, contract terms and relationship holders are reviewed, the risk can be assessed objectively. The purchase price can rest on stable revenue and the agreement can contain appropriate warranties, information duties or covenants.
For particularly important relationships, the transition should be actively planned.
If a few relationships carry the value and termination rights are unclear, the buyer should not derive the price only from historic figures. Earn-out, holdback, specific warranties or closing conditions for key contracts can be considered.
Retention of key employees can also be decisive.
The first step is an analysis of revenue and contribution margin by customer, product group, region and channel. A high-revenue customer is not automatically a risk if contract, margin and relationship are stable. It becomes critical where the relationship can be terminated at short notice or is held only by one person.
On the supplier side the review covers sources of supply, alternatives, price change rights, minimum purchase obligations and exclusivity. Whoever can obtain a special component from only one supplier buys not only a business but also a dependency.
Buyers should check whether customer and supplier contracts exist in writing, how long they run and which termination rights apply after a change of ownership. Price adjustment clauses, minimum quantities, exclusivity, supply penalties and change-of-control clauses are also relevant.
The finding feeds directly into the purchase agreement. A high dependence can justify warranties on continuing contracts, disclosure duties, indemnities or a variable purchase price. The post on the earn-out clause explains how a variable purchase price works.
Not every concentration is dangerous. Stability after closing is decisive.
| Point | Meaning | Contract solution |
|---|---|---|
| Revenue concentration Revenue concentration | One customer carries large share | Review earn-out or warranty |
| Supplier monopoly Supplier monopoly | No short-term alternative | Indemnity or stock plan |
| Short term Short term | Contract ends soon | Condition or holdback |
| Personal tie Personal tie | Relationship depends on one person | Plan management retention |
| Price change right Price change right | Margin can shift | Secure pricing assumptions |
Caution with historic figures: Historic revenue does not prove that the customer remains after closing. Review contract, termination right and relationship holder. Otherwise you may pay for revenue that leaves with the seller.
A clean finding does not automatically mean that the deal should stop. Often it is enough to price the risk correctly and reflect it in the agreement. Specific warranties, disclosure of individual customer risks, an earn-out, a holdback or a special termination right can be considered.
The post-closing phase should also be prepared. Whoever acquires customer relationships must plan communication, contact persons and continuity of service. The post on key employees in a business acquisition deepens this point.
There is no fixed threshold. A relationship is critical where its loss materially changes revenue, margin or company value and the contract is not securely stable.
In due diligence, customer lists are usually disclosed in stages. Confidentiality and competition risks can be protected through an NDA, redacted information or clean-team rules.
Options include warranties on supply contracts, stock build-up, transitional services, indemnities or purchase price adjustments if a key contract falls away.
When buying a company, structure, review and contract decide. Call us directly or send an email, callback within one business day.
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