Customer Concentration

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April 17, 2019

by a searcher from The University of Texas at Austin - Red McCombs School of Business in Austin, TX, USA

Looking at a paper product manufacturer where the primary customers are distributors and the top 3 represent ~50% of sales. Do the traditional thresholds for customer concentration still hold for distributors, or is this typical for the industry?

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Reply by a searcher
from University of Pennsylvania in Miami, FL, USA
Good question Tristan. I am under LOI with a company that generates ~40% of revenue from 1 CUSTOMER....however, it is an industry dynamic that every other business in this particular industry faces. There is really no other choice. As relates to you, I think there are 3 variables:

1) what is the dynamic between the distributor and your company - are you selling to distributor or end customer? can distributor drop you easily? do they have any reason to.? can you replace them easily? why do they want to stick with you?

2) Dynamic between distributor and end client - who has the leverage? who is making the buy decisions?

3) Industry dynamic - do other similar products face the same challenges and there is no way to diversify away from these 3. are there lots of competitors that could easily replace you in the line-up.

This is not a deal killer and may be an opportunity to get a lower price and to grow the business in other directions.
Jason
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Reply by an admin
from Stanford University in Honolulu, HI, USA
Searchers interested in this topic may also find these posts useful:: Our interview with ^redacted‌, Be Wary of Customer Concentration https://www.searchfunder.com/post/be-wary-of-customer-concentration and Search Fund Red Flag: https://www.searchfunder.com/post/search-fund-red-flag-customer-concentration
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