Client concentration risk mitigation techniques

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September 17, 2019

by a searcher from University of Pennsylvania - The Wharton School in Milan, Metropolitan City of Milan, Italy

I've come across a fair few companies that have great numbers but one very large client (20%+ of sales). Aside from operational risk mitigation tactics (e.g. get more clients!), I wonder whether there are any risk mitigation techniques or tactics that are used at the time of acquisition (e.g. clauses or conditions in the docs, earn-outs tied to this issue, etc.)?

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Reply by a searcher
from University of Vermont in New York, NY, USA
There exist innumerable ways of handling customer concentration risks, but the best is simply to aggressively rebalance the customer base ASAP. Other ways often attempt to shift the risk back to the seller, but then the seller says, "I am no longer controlling the company, and I don't know what you [buyer] will do to screw it up." Depending upon circumstances, depth of relationship, both from a personnel and product perspective, 20% isn't really that bad. Would you be surprised to hear that Walmart often represents some 20% of MAJOR suppliers (i.e. CPG companies like Gillette, P&G, etc.). Another way is to build in a more conservative capital structure, so that the loss of that customer wouldn't kill the company. I would be glad to speak with you directly, if you'd like to reach out. Good luck.
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Reply by an admin
from Stanford University in Honolulu, HI, USA
For others who may be facing customer concentration concerns, here's an interview: Be Wary of Customer Concentration with ^redacted‌: https://www.searchfunder.com/post/be-wary-of-customer-concentration.
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