High Customer Concentration

November 06, 2023

by a searcher from Fairfield University - Charles F. Dolan School of Business in New Haven, CT, USA

Hello,

I'm reviewing the CIM for a company that kits for manufacturers.

It has been in business for more than a decade, but one of its customers represents 80 percent of its revenue. The other customer represents 20 percent of its revenue.

I am concerned that either this company never marketed/tried to reach new clients or that getting in with new clients is extremely difficult.

I think it's a relatively low barrier to entry for competitors also.

I like the idea of the business and it's only about 90 minutes from my house. but I don't want to make the wrong choice.

Any thoughts?

Thank you, Dee

1 Like

21 Replies

142 Views

Replies

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Thanks ^redacted‌ for the tag as well. The questions I would ask are as follows:

1) How many different items do they produce for the subject client? If it is just a couple the exposure is much greater. If they produce many different items it could be significantly harder for them to move the business.

2) How financial strong is that one customer? Namely, how long have them been in business and what can you find out about who they are and who their customers are?

3) What relationship does the seller have with this customer? Is this a customer only doing business with the seller because of a personal relationship?

4) How easily can you bring other clients to the customer to diversify the client base?

I hope this helps. We have done financing for businesses with high concentration before, but usually most of the above metrics need to line up in favor of the buyer. If not it can be really hard to get done. Truthfully, if these items do not measure up, the deal likely will largely need to be funded by the seller. If you have additional questions you can reach me at redacted Good luck!

Reply by a searcher
from Harvard University in Rye Beach, Rye, NH, USA

Not a great situation from a risk standpoint, but you do have some options to consider. First and best is to use the concentration issue to negotiate are VERY large forgivable seller note (or other similar contingent payment / earnout). Theoretically possible to model the value of the business without the main customer, pay that guaranteed, hedge the rest. Make out quite well if you manage to keep the customer, dont lose your shirt if they bail. Only recommended if you really like the other aspects of the business and can convince yourself that the customer probably wont leave. Also, consider getting seller buy-in to perform a customer satisfaction survey to gauge the health of the relationship, likely to endure/grow, stickiness/points of value from customer POV, ability to attract other similar customers, etc. Can do yourself if you feel comfortable or outsource. I sold a company with even higher customer concentration than yours for a great multiple, but we had rock solid IP protection and the customer was essentially locked up with us for year and years to come. DM me if you want to discuss further.

+19 more replies.

Join the discussion