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Supply chains a dealmaking snag for retail

Illustration of a shipment of cargo surrounded by traffic cones.

Illustration: Gabriella Turrisi/Axios

In today's climate, a risky supply chain can make or break a retail deal, advisers tell Axios.

Why it matters: In 2024, retailers are staring down risks like growing cybercrime, labor unrest, more extreme weather, and the specter of a potential government shutdown.

What they're saying: "It literally seems like every two years or so there's some massive globally impacting supply chain disruption," Aron Bohlig, managing partner at ComCap, says.

  • If an ESG or political risk comes to bear, "they are going to be a K.O. factor," Bohlig says. "They are going to knock out a deal from consideration right out of the go."

The big picture: Supply chain risk is particularly prevalent in production sectors: construction, fishing, farming, food, clothing and textiles, and footwear.

  • Risks can include supplier bankruptcies, cybersecurity, and ethical concerns with sourcing, alongside large macro events like natural disasters and political instability.
  • Investors are wary of chains tied to Russia, Venezuela and Brazil, which despite its large economy, has seen political turmoil, Bohlig says.

Zoom in: Bohlig says he's recommending his clients do upfront diligence and sometimes change business practices before considering coming to market.

  • Kristin Bahnsen, partner at Dentons Global Advisors, says she looks at compliance standards like the EU corporate sustainability reporting directive and the Uyghur Forced Labor Prevention Act.
  • Founders looking to sell must start onshoring and nearshoring, as well as employing supply chain visibility platforms to ensure their Tier 1, 2 and 3 supply chains align with fair global practices, says Paul Weiss partner Laura Turano.
  • "If you're on the sell side and you know smart buyers are going to be thinking about this, actually looking into it before so you're not surprised when buyers are asking you," Turano says.

Friction point: Supply chain issues take a while to resolve, which can sometimes kill deals, Bohlig says.

  • Whether companies are working with current suppliers on issues or developing relationships with new suppliers, both strategies take time.
  • Plus, potential acquirers want to see a credible plan put in place to address the supply chain issue.
  • "So it can be a two-year delay-slash-killing a process when one of these things come up," Bohlig says.

Reality check: Bahnsen counters that these factors don't necessarily make "an opportunity disappear."

  • But it elongates the list of considerations, she says, making the checklist longer.

The bottom line: "You wouldn't want to look into something, realize it's a huge business issue that keeps you from being able to sell on your timeline, and also realize you now have a compliance issue that you need to solve," Turano says.

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