Anonymised, illustrative composite. The confidential information memorandum listed the target’s main input supplier as a stable, long-term relationship. The supply agreement itself said something the summary did not: the target could not buy that input from anyone else.
At a glance
A strategic buyer agreed, subject to due diligence, to acquire 100% of a light-manufacturing business at a 4.5× multiple of trailing EBITDA of $2.6 million. The confidential information memorandum described the target’s relationship with its principal raw-material supplier as a strength: eleven years, no disruptions, favourable payment terms. The main body of the supply agreement, reviewed early in diligence, said nothing to contradict that.
What the main body did not say was in Schedule C, a pricing and volume annex the seller’s data room had filed separately from the agreement itself. Schedule C required the target to source “100% of its requirements” for the input from the supplier for the life of the agreement, which renewed automatically for successive two-year terms unless either party gave twelve months’ notice — and carried no exit right tied to a change of control of the target. Pricing was fixed with a 3% annual escalator, unrelated to any published index.
The buyer’s own procurement team, asked to benchmark the input as part of commercial diligence, obtained a competing quote for equivalent volume and specification from an alternative supplier: 12% below the exclusivity price. Under the existing agreement, the target could not act on it. The exclusivity clause did not merely make switching inconvenient — it made switching a breach of contract, evergreen, with no date on which the obligation simply expired.
The target’s spend with the exclusive supplier ran $2.1 million a year. The competing quote, at 12% lower, priced the same volume at $1,848,000 — a gap of $252,000 a year. Because the exclusivity clause was evergreen rather than time-limited, that gap was not a one-off cost to price into a holdback; it was a permanent drag on run-rate EBITDA for as long as the clause remained in force. Valued at the deal’s own 4.5× multiple — the same multiple applied to every other dollar of EBITDA in the transaction — $252,000 of annual margin capitalised into a $1,134,000 reduction in what the business was actually worth.
There is no statute that overrides a validly agreed exclusive-supply clause; a target is bound by what it signed. What decided the outcome was a valuation question, not a legal one: once a contractual constraint is found to depress run-rate earnings on a continuing basis, sound Canadian valuation practice treats it the same way it treats any other normalisation issue. CBV Institute’s Practice Standards, effective 1 January 2026, require a valuator to reach “a credible and properly supported conclusion of value” (CBV Institute) — which is precisely why an above-market, non-cancellable supply obligation belongs in the normalisation analysis rather than being left as a footnote in the CIM.
Had the buyer relied on the CIM’s narrative description of the supplier relationship and read only the body of the agreement, the $1,134,000 gap would have been invisible until the first post-closing budget cycle, by which point it would have looked like a margin-management failure inside the new owner’s own operations rather than what it actually was: a liability priced into the business at signing and never adjusted for. Catching it during diligence turned an invisible, permanent earnings drag into a negotiated, one-time reduction in the price paid for it.
The tell was structural, not financial: a supply relationship the CIM calls stable and long-term, governed by a “master agreement” that is short and unremarkable, with the commercial terms living in a separately filed schedule or annex. A diligence process that reviews the agreement everyone points to, but not every schedule referenced inside it, will miss exactly this kind of clause — because it was never hidden, just filed apart from the document a first read treats as complete.
The buyer did not walk from the deal. It renegotiated price, taking the $1,134,000 capitalised gap as a reduction to enterprise value, and separately required the seller to seek a written waiver narrowing the exclusivity clause’s evergreen renewal before closing — a request the supplier, keen not to lose the relationship outright, ultimately agreed to in exchange for a shorter, fixed five-year term with a market-index pricing mechanism replacing the flat escalator.
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