Top Red Flags Investors Look For While Vetting A Vendor Or Supplier To Their Portfolio Companies

Vetting a new vendor or supplier is integral to maintaining a successful and thriving business. However, not everyone may be aware of precisely what to look for when making this decision.
Jul 2, 2022
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Vetting a new vendor or supplier is integral to maintaining a successful and thriving business. However, not everyone may be aware of precisely what to look for when making this decision.

And there are a number of red flags investors look for while vetting potential partners. Below, we'll outline some of the most common warning signs indicating a company may not be a good asset in an investor's portfolio.

Bad Reputation

It may seem obvious, but we need to mention it. A bad reputation is an obvious red flag for investors. It could mean that the company is not well-respected by its customers or has a history of poor customer service. Either way, it's not a good sign. 

Investors will also be wary of companies that have been involved in legal troubles, such as lawsuits or regulatory investigations. That could indicate that the company is not well-managed or not compliant with industry standards. 

If a company has any of these red flags, it is likely to be a risky investment.

Not Responsive To Customer Complaints

Investors also want to ensure that the company responds to customer complaints. They want to know that the company takes complaints seriously and works to resolve them on time.

There are a few key things that investors look for when determining if a company is responsive to customer complaints. First, they will check to see if the company has a process for handling complaints. This could include a customer service department or a dedicated team that handles complaints.

Poor Customer Service Record

But even if a company has customer service in place, the question is whether it is effective. If a company has a history of poor customer service, it will likely not be able to provide the level of service that its portfolio companies require.

One indication could be that a company constantly changes its customer service policies or procedures. That can imply that they are not stable and could pose a risk to your portfolio companies.

Or does the company have any awards or recognition for its customer service? This can be a good indication that the company is committed to providing excellent customer service.

Lack Of Ability To Provide The Product Or Service As Promised

Investors want to ensure that the company they are considering can actually provide the product or service as promised. If not, it can be a major problem for companies relying on the vendor or supplier to provide a critical component of their business. 

If the vendor or supplier cannot meet their obligations, it can seriously impact the company's operations. 

There are a few key things that investors look for when determining if a company can deliver on its promises:

For example, they may check to see if the company has complaints or negative reviews about their product or service. 

Another indicator could be the on-time delivery rate. This is the percentage of orders the company can deliver on time. A high on-time delivery rate can indicate that the company can provide the product or service as promised.

Unreasonable Payment Terms

Another red flag investors look for when vetting a vendor or supplier is unreasonable payment terms. A red flag is if a vendor or supplier asks for payment upfront or terms significantly different from their competitors. It can be an indication that they may not be a reputable company.

For example, if the company is asking for payment upfront, it could be a sign that they are having cash flow problems. 

Another red flag is if the company is offering discounts for early payment. It could imply that they are desperate for cash and are willing to give up margin to obtain it.

Lack Of Transparency

Investors look for companies that are transparent about their business practices. Transparency is a sign of a company's trustworthiness.

Furthermore, a lack of transparency can indicate that a company is not well-organized or prepared to do business.

There are a few key things that investors look for when determining if a company is transparent. For example, is the company forthcoming about its financial information?

But it could also be anything from being unable to provide a clear and concise overview of their business when asked to being evasive about pricing or refusing to put something in writing.

If a vendor or supplier is unwilling to be transparent, it's a good indication that they're not worth doing business with.

Lack Of Industry-Specific Knowledge

An investor wants to know that the vendor or supplier is familiar with the industry in which their portfolio company operates and that they understand the unique challenges and opportunities that come with it.

This can be a significant issue if the vendor or supplier is working in an industry that is new to them or if they are working in a rapidly changing industry. In either case, the vendor or supplier may not be able to keep up with the latest trends and developments, which could lead to problems down the road. 

Vendors and suppliers need to demonstrate a good understanding of the industries they serve so that investors can have confidence in their ability to meet the needs of their portfolio companies.

Inadequate Preparation

One of the biggest red flags for investors is when a vendor or supplier is not adequately prepared. This can manifest itself in several ways, such as not having a clear understanding of the portfolio company's business, not being able to articulate a clear value proposition, or not having a well-developed product or service. 

This lack of preparation can be a major turn-off for investors looking for vendors and suppliers that are ready and able to provide value to their portfolio companies.

Lack Of A Clear Value Proposition

A clear value proposition sets the company apart from its competitors and shows what it can offer investors. If a company doesn't have a clear value proposition, it may be challenging to understand what it does and how it can help portfolio companies.

Additionally, a lack of a clear value proposition may indicate that the company is not well-positioned to compete in its market. And it could make it difficult for investors to get a return on their investments.

Poor Communication

Good communication is one of the most critical factors for investors when vetting a vendor or supplier. It raises a red flag if a vendor or supplier is not responsive to questions or concerns.

Poor communication can lead to problems, such as miscommunications about deadlines or products. It can ultimately damage the relationship between the vendor or supplier and the portfolio company.

Additionally, if a vendor or supplier is unclear in their communications, this can indicate that they are not organized or, even worse, incompetent. Either way, it may be a sign that they are not a good fit for the portfolio company. 

Lack Of A Clear Sales And Marketing Strategy

A clear sales and marketing strategy is essential for any company. That includes a detailed plan for how the company will reach its target market, what channels will be used to market the product or service, and how much it will cost to acquire new customers.

A lack of a clear sales and marketing strategy is often a red flag for investors, as it indicates that the company may not have a clear plan for how to generate revenue.

The Vendor Or Supplier Is Not In Good Standing With The State In Which They Are Registered.

If a vendor or supplier is not in good standing with the state in which they are registered, it is a clear red flag for investors.

This could indicate that the vendor or supplier is not financially stable or that they have been unable to meet the requirements to stay in good standing.

But it could also mean that the vendor or supplier is not following the law, which could lead to legal problems.

The Vendor Or Supplier Does Not Have A Physical Address.

If the vendor or supplier does not have a physical address, it is often a sign that the company is not legitimate and could be a scam.

Investors can check online directories, such as the Better Business Bureau, to see if there are any complaints against the company. Or they may contact the Chamber of Commerce in the area where the company is supposedly located to see if they are listed.

If there is no information about the company, it certainly raises a red flag.

The Vendor Or Supplier Does Not Have A Website.

A red flag when investors look while vetting a vendor or supplier is whether or not they have a website. A website is a key indicator of a company's legitimacy and professionalism, showing that the vendor or supplier is willing to invest in their business.

If a vendor or supplier does not have a website, they are likely not a serious business, and investors will be hesitant to work with them.

Additionally, a website can provide valuable information about a company, such as its contact information, products and services, and customer reviews. Without a website, it can be difficult for investors to get a clear picture of a vendor or supplier and what they can offer.

The Vendor's Or Supplier's Website Is Not Up To Date.

Related to the former topic is also whether a vendor or supplier's website is up-to-date. A website is often the first impression an investor will get of a company. If the website is not up to date, it can give the impression that the company is unorganized and unprofessional.

The website should be easy to navigate and contain accurate and up-to-date information about the company's products and services and contact information.

If a vendor or supplier's website is not up to date, it may be a sign that the company is not doing well and could be a red flag for investors.

Lack of a Sustainable Competitive Advantage

A sustainable competitive advantage is another factor. This could be a unique technology, a strong brand, or a loyal customer base.

Without a sustainable competitive advantage, it will be difficult for a company to maintain its market share and grow over time.

Investors will also want to see that the company has a clear plan for how it will defend its market share against competitors.

Over-Reliance on a Single Product or Service

When evaluating a vendor or supplier, one of the top red flags for investors is over-reliance on a single product or service.

It could mean that the company is not diversified enough and may be at risk if that product or service becomes obsolete or goes out of style.

Additionally, it can be difficult for a company to scale if it is too reliant on one product or service. For these reasons, investors will often shy away from companies that are too reliant on a single product or service.

Lack of a Diverse Customer Base

This can be a red flag because it indicates that the company is not well-rounded and could be at risk of financial trouble if one of its major customers decides to leave.

A lack of a diverse customer base also makes it more difficult for a company to grow its business since it will be reliant on a small number of customers.

High Turnover Rate

A high turnover rate is another red flag investors look for while vetting a vendor or supplier for their portfolio companies. This is because a high turnover rate indicates that the company cannot retain its employees, which can be a sign of poor management or working conditions.

If a company has a high turnover rate, it may also have difficulty attracting and retaining customers as well as attracting and retaining talent.

That can lead to a downward spiral for the company, which is why investors are wary of companies with high turnover rates.

How Can Proven Help In The Process?

Keeping track of all vendors and their business practices can be very time-consuming. An easier way is to partner with Proven. 

Proven makes it easier to find and recommend good vendors for the companies in your investment portfolio. With Proven, you can create a marketplace of pre-approved suppliers from which your portfolio companies can choose.

Many investors are flooded with requests from different vendors to be a part of their portfolios. Many of them are small vendors that the investors have never heard of. To vet them takes a lot of resources and time. And so many investors shy away from it, as they don't have the resources to conduct a thorough investigation.

Proven solves that problem by allowing investors to invite possible future vendors to their platform, and vendors then have to prove that they are reliable partners.

Vendors must upload documents such as case studies, videos, and invoices to get them approved in the portfolio. They must also prove existing relationships with other clients by uploading press releases and/or URLs that prove their client relationships.

The Proven system also automatically sends out an email to clients and asks them to verify that the vendor has a successful relationship with this client.

So the entire process of vetting a new vendor is transferred to the vendor. That allows investors to work with smaller, unknown suppliers as the vetting process is much easier and more reliable.

The Proven platform, therefore, not only saves investors time it also ensures that their portfolio companies only work with high-quality vendors. Plus, because all preferred vendors and portfolio companies are in one place, it's easy to keep track of everything.

Conclusion

So, what do investors look for when vetting a potential vendor or supplier? As we have seen, there are many factors to consider, starting with a good reputation, providing the product or service as promised, and having a good customer service record.

But by all means - this list is not comprehensive. Many other indicators suggest that a vendor or supplier is not a good fit for their portfolio. To mention a few: Inadequate safety standards or practices, ethical or environmental concerns or violations, or political instability in the country where the company is based.

But PROVEN can help in the process. After all, having reliable vendors and suppliers is crucial to the foundation of a successful business and partnership.

So go ahead and explore the PROVEN portal-it'll make your life much easier!

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