A former client took me to lunch recently and shared that his top manufacturer, accounting for 60% of his revenues, had dropped him as their distributor. It was nothing he did wrong, other than being small; it turns out a larger competitor lost a competing line when their manufacturer took all sales efforts in-house and his vendor switched to the larger competitor.
Business buyers, banks and advisors stress how important customer diversity is. Nobody wants their top three customers to account for 63% of their sales. Often neglected is a vendor dependency and it can be just as serious, especially if there isn’t a replacement product.
Actually, all dependencies are bad and can reduce value. While discussing an exit plan with an owner I stated that 80% of small businesses have a dependency on the owner. The owner has not been able to delegate or train others, doesn’t have the cash flow to bring on someone to delegate to or just wants to be in control. Whether or not it’s unavoidable it reduces the value of the business.