Avenues to Explore for a Successful Supply Agreement

One aspect that has potential to add significant value to a divestment or acquisition is a mutually beneficial supply agreement.  This can be a positive for the incoming company because of the long ramp up times to inception for a new company. Having a supply agreement in place limits cash burn and adds stable income for a determined period of time.  For the divesting company, there’s comfort in having your product produced to the same standard, and on the same equipment, in the event that they are moving to a contract manufacturer.

Things to explore from either party:

Level of detail:

  • Make sure everything is well thought out and there are no assumptions made that can be taken advantage of by either party.

Terms and Conditions:

  • Clear start and end dates, with options for extension, who determines the extensions, and how much notice is necessary.

Terms of Payment:

  • Take-or-pay is a provision which guarantees the seller a minimum portion of the agreed on payment if the buyer does not follow through with the contract.
  • For the negotiated price, will it be:
    • Frontloaded: Higher upfront cost which is shrinking as it nears end of term
    • Fixed: Standard pricing throughout expiration 
    • Variable: Based on commodity and utility costs

Legal Examination and Compliance

  • Always make sure contracts and agreements are reviewed by either in-house council or a third party. 

In conclusion, there are numerous steps and considerations when evaluating M&A, Carve-out, or divestment opportunities.  FabExchange can help explore these options as an advisor to your future restructuring needs.  Please reach out and contact us for more information.

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