Supplier Contracts in Operations Due Diligence: What to Watch For

Operations due diligence often centers on manufacturing processes and distribution –

identifying inefficiencies, ticking boxes, and moving on. But that narrow focus can obscure a

critical source of risk and value : supplier contracts.

In discrete manufacturing businesses, supplier agreements are not just administrative artifacts.They reflect the maturity of supply chain operations—and often embed financial risks that don’t appear on the balance sheet but can surface unexpectedly post-close.

This post explores two concepts that are critical for both startup and scale-up operators—and for the investors evaluating them during a capital raise or M&A transaction:

Supplier Due Diligence

1. How supplier contracts evolve as a business scales.

Early-stage companies often treat supplier contracts as a compliance task rather than a

strategic tool. But without thoughtful structuring and active management, these

agreements can quietly become liabilities.

2. The hidden risks embedded in supplier agreements.

Poorly structured terms can lead to sudden margin compression, unexpected working

capital needs, and costly surprises.

Let’s unpack how these two forces intersect—and how a more disciplined approach can unlock value while reducing downside risk.

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As your business evolves, so should your supplier contracts

Startups and early-stage businesses rarely have negotiating leverage. Their early supplier

contracts reflect that: long lead times, high minimums, limited flexibility, and unfavorable

payment terms. That’s expected.

Surprisingly, many companies fail to renegotiate these terms as they grow. A business with

rising volumes and stronger cash flow should be able to command:

• Lower minimum order quantities

• Shorter lead times or stocking programs

• Shared liability on excess or obsolete inventory

• Improved pricing tiers and payment terms

  
  

Yet many continue operating under outdated contracts, mistaking inertia for change. For

buyers, this is a red flag: if contracts haven’t kept pace with business growth, they’re likely

destroying value through unnecessary working capital drag or inflated cost structures.

Let’s look at how contract terms evolve with the lifecycle stage of a company.

Operations due diligence should always review supplier terms in the context of the

company’s current scale—not just whether they are being honored.

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Hidden Risks in Supplier Contracts

Off-balance sheet liabilities are among the most overlooked risks in supplier agreements. Let’s explore this through two perspectives: the product company and the investment/M&A principal.

Consider the lessons from when the electronics industry found itself in hot water. Many

companies underestimated their suppliers’ procurement pipelines and were blindsided by

excess inventory liabilities when demand shifted.

Lessons from the Dot-com bust

This isn’t just history repeating itself. Even today, many businesses lack a structured approach to estimating supplier-related exposure. The result? A recurring cycle of surprises, margin shocks, and strained relationships when demand drops or product mix shifts.

A recent example = COVID

As a business matures, it is critical to understand how supplier contracts are triggered by

operational decisions – whether that’s through purchase commitments, safety stock

agreements, or supplier-managed inventory.

Operational triggers

To proactively manage these risks—whether you’re an operator or an investor—you need a

structured approach.

The real takeaway? These aren’t just “supply chain issues.” They’re strategic financial levers.

Smart operators and investors treat supplier contract discipline as part of the capital structure. Better terms mean:

• Lower risk-adjusted working capital

• Improved margin predictability

• Less volatility in valuation models

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Conclusion: Build the Discipline Before the Deal

At Assetive, we operate at both sides of the equation: we help start-ups and scale-ups build

supply chain infrastructure that stays one step ahead of growth, and we lead or support due

diligence for VC’s, PE’s and Family Offices.

Operational contracts often stay invisible—until they become a problem. Whether you’re

managing a growing company or evaluating one for acquisition, understanding the link

between supplier agreements, inventory liability, and enterprise value is essential.

Take the time to dig into the details. Renegotiate legacy contracts. Build inventory exposure

models. Push for supplier transparency. These quiet levers drive resilient, high-performance

businesses—and help you avoid the costly surprises that hide in the fine print.