Customer concentration risk, supplier relationship dependency, operational systems that work but aren't documented. Your largest customer represents 35 percent of revenue. Your key supplier relationships took 15 years to build. Everything runs smoothly until you try to transfer it.
Wholesale Distribution • Warehousing • 3PL • Fulfillment Services • Supply Chain Management
Distribution and logistics businesses have a concentration problem that destroys value more than almost anything else: customer concentration. Your top three customers represent 60 percent of revenue. Your largest customer alone represents 35 percent. The business is profitable and operations run smoothly, but you're completely dependent on a handful of customer relationships.
This creates obvious transferability risk. What happens if the largest customer leaves post-acquisition? What happens if they renegotiate terms because they know the business depends on them? What happens if their business struggles and they reduce order volume? Buyers looking at distribution businesses ask these questions immediately.
The math is brutal. A distribution business doing $8 million in revenue with $800,000 in EBITDA should be worth $2.8 million to $3.6 million at 3.5 to 4.5 times EBITDA if customer concentration is reasonable. But if 60 percent of revenue comes from three customers, buyers don't pay for $800,000 in EBITDA. They pay for the EBITDA that would survive if one or two of those customers left. That might be $400,000 to $500,000 in sustainable EBITDA. Valuation drops to $1.4 million to $2.25 million. The business loses $1.4 million to $1.35 million in value because of customer concentration.
The challenge is that customer concentration develops naturally in distribution and logistics. You land a large customer. They're profitable. You build infrastructure to serve them well. They increase order volume. You invest more in serving them. The relationship deepens over years. Revenue from that customer grows to 20 percent, then 30 percent, then 40 percent of your total. This feels like success because the customer is loyal and profitable.
But from a transferability perspective, you've built a business that's dependent on one customer relationship. If that relationship is personal, meaning the customer works with you specifically and trusts you personally, the dependency is worse. Even if the relationship is institutional, meaning the customer works with your company and doesn't care who the owner is, high concentration is risky.
Most distribution business owners don't think about customer concentration as a problem while they're building the business. The relationship is strong. The customer is growing. Revenue is increasing. Why would this be bad? Then they try to exit and buyers immediately flag it as the primary risk factor.
The solution is customer diversification over three to five years before exit. This doesn't mean firing your largest customers. It means deliberately growing revenue from smaller customers and new customers so the largest customers represent a smaller percentage of total revenue. If your top customer goes from 40 percent of revenue to 25 percent not because they shrunk but because you grew other customers, concentration risk decreases significantly. Buyers will still discount customer concentration, but the discount is manageable instead of fatal.
Distribution businesses are intermediaries between suppliers and customers. Your value comes from having access to products that customers want and having relationships with suppliers that give you advantages competitors don't have. Those supplier relationships took years to build and often involve personal relationships, negotiated terms, and trust developed over hundreds of transactions.
This creates transferability challenges. A buyer inherits your supplier accounts but not your supplier relationships. They get access to the same products at the same base terms, but they lose the relationship leverage that made your business profitable. The preferential pricing you negotiated. The flexibility on payment terms. The priority access when products are scarce. The willingness to expedite shipments when you need them. These advantages come from relationship history, not from contract terms.
Buyers know this. When they're evaluating distribution businesses, they ask: what happens to supplier terms post-acquisition? Will the business maintain its cost advantages? Will suppliers continue to prioritize this customer? Or will terms revert to standard once the relationship changes hands?
The answer depends on whether your supplier relationships are personal or institutional. If suppliers work with your company and the relationships are systematized with documented terms and multiple contact points, they'll likely transfer smoothly. If suppliers work with you personally and trust you specifically because of years of relationship building, the transfer is risky.
Document supplier relationship value to reduce buyer uncertainty. For each key supplier, document more than just pricing and terms. Document the history of how you built the relationship. What value do you provide that makes suppliers want to work with you? How did you negotiate current terms? What leverage points exist? Who are the key contacts? What makes this relationship valuable beyond standard supplier terms?
This documentation serves two purposes. First, it helps buyers understand what supplier relationships are worth and how to maintain them. Second, it creates institutional knowledge that outlasts personal relationships. If your documented supplier knowledge is good enough that a new owner can maintain 80 to 90 percent of your supplier advantages, buyers price the business higher than if they assume supplier advantages disappear post-acquisition.
The supplier relationship challenge is worse when products are commoditized. If you're distributing products where 10 suppliers offer essentially the same thing, your competitive advantage is entirely in supplier relationship leverage. Better pricing. Better terms. Better service. If those advantages don't transfer, you're selling a business with commodity margins, not competitive advantage margins. Buyers pay commodity prices for commodity businesses. If products are specialized or if you have exclusive distribution rights, supplier relationship leverage matters less because product access itself is the advantage. But most distribution businesses operate in competitive categories where supplier relationship management is the difference between profitable and marginal.
Distribution and logistics businesses run on operational systems. Inventory management, order processing, warehouse operations, shipping coordination, quality control. These systems work smoothly when you're running them because you built them and you know how they actually function versus how they're supposed to function.
Buyers need to understand these systems to operate the business successfully. But most distribution businesses have underdocumented operations. The systems exist and they work, but the knowledge of how they work lives in people's heads rather than in documentation.
Here's a common example. Inventory management seems straightforward. Buy products. Stock them. Sell them. But the actual complexity is in knowing what to stock and when. Which products move fast versus which ones sit. How much safety stock to maintain for different products. When to place orders based on supplier lead times and customer demand patterns. What to do when suppliers are backordered. How to handle slow-moving inventory before it becomes dead stock.
You know all of this because you've managed inventory for 15 years. You've learned through experience which products need deep stock and which ones to keep minimal. You've built supplier relationships that let you get rush deliveries when you underestimated demand. You've developed judgment about when to clear out slow movers and when to hold them.
This knowledge is competitive advantage. Your inventory turns are better than competitors because you know what to stock. Your fill rates are higher because you don't run out of fast movers. Your dead stock is lower because you manage slow movers proactively. But none of this knowledge is documented. It's operational intuition.
Document the decision frameworks for inventory management, not just the processes. What factors determine reorder points? How do you assess demand trends? What signals indicate a product is becoming slow-moving? How do you decide when to discount for clearance? These decisions happen constantly in distribution businesses. Documenting them creates knowledge that transfers instead of evaporating when you leave.
Do the same for other operational systems. Order processing, warehouse operations, shipping coordination, customer service handling. The processes might be documented in standard operating procedures. The decision frameworks for handling exceptions and optimizing operations probably aren't. That's the gap that destroys transferability. Buyers can hire people to execute standard processes. They can't replicate your operational judgment without documentation. The difference between a distribution business that operates at 75 percent efficiency under new ownership versus one that operates at 95 percent efficiency is often just documentation quality.
All eight drivers matter for distribution and logistics businesses, but three determine whether customer concentration and relationship dependency destroy value or whether you've built diversified, transferable operations.
Customer Satisfaction in distribution and logistics isn't just about whether customers are happy. It's about customer concentration and contract length. You can have 95 percent satisfaction scores, but if your top three customers represent 70 percent of revenue, that satisfaction is risky. We measure this by looking at customer concentration percentages, contract length, and switching costs. High concentration with short contracts means customers can leave easily. Lower concentration with long contracts and high switching costs means satisfaction is sustainable. Buyers discount heavily for concentration risk because one customer departure can collapse the business.
Switzerland Structure asks whether operations depend on any one person beyond the founder. Distribution businesses often have key people who manage critical customer relationships or supplier relationships. If your largest customer relationship is managed by one person, and that person leaves post-acquisition, the customer might follow. If your most important supplier relationships are personal to one employee, those advantages might disappear when that person departs. Building this requires distributing relationship management across multiple people and documenting supplier leverage so it's institutional, not personal.
Hub and Spoke measures whether operations run without founder decisions. Distribution businesses often score reasonably here because operational systems are necessary for scale. But strategic decisions about inventory management, pricing, customer negotiations, and supplier relationship management typically require founder involvement. Building Hub and Spoke requires documenting the decision frameworks for these strategic choices and developing an operations manager who can make good decisions without constant founder input.
The other five drivers matter, especially Cash Flow in inventory-intensive businesses and Growth Potential in expanding markets. But these three determine whether distribution and logistics businesses trade at premium multiples or commodity multiples. We've seen distribution businesses with strong Financial Performance and good operational efficiency sell below expectations because Customer Satisfaction had dangerous concentration, Switzerland Structure concentrated critical relationships in one or two people, and Hub and Spoke required founder involvement in strategic decisions.
Most distribution business owners know customer concentration is a risk. They just don't think it matters until buyers discount offers by 40 to 50 percent because of it.
The Reality Check shows you where customer concentration, supplier relationship dependency, or undocumented operations are destroying your exit value. You'll see your scores. You'll understand what needs to fix.
Cost: $997 one-time
Time: 90 minutes
Value: Truth about distribution transferability