Due Diligence Checklist for Buying an Industrial Supply Distributor

Request a revenue-by-customer report for the last 3 years showing each account's annual spend.

Identifies concentration risk and whether any single customer dominates revenue.

Red flag: One customer exceeds 25% of total revenue with no long-term contract in place.

Analyze top 10 customer purchasing history for year-over-year consistency and order frequency.

Repeat, growing accounts signal sticky relationships and predictable cash flow.

Red flag: Multiple top accounts show declining spend over two or more consecutive years.

Confirm whether customer relationships are tied to the owner or managed by sales staff.

Owner-dependent accounts are high attrition risk immediately post-close.

Red flag: Owner is primary contact for accounts representing more than 40% of revenue.

Review any existing master supply agreements, blanket purchase orders, or preferred vendor contracts.

Documented contracts provide post-acquisition revenue protection and pricing certainty.

Red flag: No written agreements exist with any of the top five customers.

Obtain a full inventory aging schedule segmented by SKU, category, and days on hand.

Exposes slow-moving and dead stock that inflates the stated asset value.

Red flag: More than 15–20% of inventory has not moved in over 12 months.

Verify whether obsolescence reserves are recorded and how they were calculated.

Understated reserves overstate net asset value and working capital in the deal.

Red flag: No obsolescence reserve exists despite a significant aging inventory tail.

Calculate inventory turnover ratio and benchmark against industry norms of 6–10x annually.

Low turnover signals poor purchasing discipline or weakening customer demand.

Red flag: Inventory turnover below 4x annually with no corrective plan from management.

Confirm whether the purchase price includes all inventory or caps at a negotiated net book value.

Inventory treatment directly affects deal economics and working capital targets.

Red flag: Seller insists on including full book value of unaudited, aged inventory at close.

Request copies of all distributor agreements, pricing tier schedules, and rebate programs with key suppliers.

Preferred pricing and rebates are core margin drivers that may not survive a change of control.

Red flag: Key supplier agreements contain change-of-control clauses requiring supplier consent to transfer.

Identify which suppliers represent 80% of COGS and assess concentration among the vendor base.

Heavy dependence on one supplier creates supply continuity and margin risk post-acquisition.

Red flag: A single supplier accounts for more than 50% of all product purchases.

Confirm whether any supplier relationships are managed exclusively by the owner with no staff backup.

Owner-held supplier contacts may not transfer, risking loss of pricing tiers or product access.

Red flag: Owner is the sole point of contact at two or more top-five suppliers.

Review exclusivity or preferred distributor agreements and confirm their remaining terms and renewal conditions.

Exclusive agreements are a competitive moat worth significant valuation premium.

Red flag: Exclusivity agreements are verbal, expired, or subject to annual renewal at supplier discretion.

Review 3 years of P&L statements and reconcile revenue, COGS, and gross margin trends by year.

Declining margins signal pricing pressure, mix shift, or competitive erosion.

Red flag: Gross margins have declined more than 3 percentage points over the last two years.

Request a gross margin breakdown by product category, supplier, and top customer accounts.

Blended margins can obscure unprofitable accounts subsidized by high-margin lines.

Red flag: Several high-revenue accounts carry gross margins below 10% with no strategic rationale.

Identify and validate all seller add-backs with supporting documentation such as payroll records or invoices.

Inflated or undocumented add-backs overstate SDE and drive valuation above fair market.

Red flag: Add-backs exceed 20% of stated EBITDA without clear documentation or one-time support.

Reconcile accounts receivable aging and confirm DSO against industry benchmarks of 30–45 days.

Extended DSO or high past-due balances signal collection problems that compress working capital.

Red flag: More than 20% of AR is over 90 days past due with no reserve recorded.

Assess the current ERP or order management system, including version, customization level, and data integrity.

Outdated or poorly configured systems create fulfillment errors and block post-acquisition scaling.

Red flag: Business operates on spreadsheets or legacy software with no real-time inventory visibility.

Review fulfillment accuracy metrics, order cycle times, and return or error rates over the last 12 months.

Operational quality directly affects customer retention and cost of goods delivered.

Red flag: Error or return rates exceed 3–5% with no documented corrective action process.

Evaluate the organizational chart and identify whether key roles are staffed by tenured employees.

Thin staffing or over-reliance on the owner creates continuity risk at close.

Red flag: Owner performs purchasing, sales, and operations functions with no qualified backup staff.

Review warehouse lease terms, facility capacity, and logistics infrastructure for post-acquisition needs.

Short lease terms or capacity constraints limit growth and create near-term capital expenditure risk.

Red flag: Warehouse lease expires within 12 months of close with no renewal option negotiated.