“Customer concentration.” We get it! Perhaps you started your business with one customer, continued the relationship, and you’re doing your best to grow with it. Maybe you’ve been fortunate to pick up a few new customers along the way. Customer concentration is a considerable risk for all those reasons that keep you awake at night worrying about losing a key customer. 

Buyers see the same risk, but it’s even more significant in their minds. For instance, potential buyers have no relationship or feelings toward those key customers; therefore, companies with a high customer concentration will sell for a significant discount with a lot of risk-sharing in the deal structure.

Strategies to Diversify Customer Concentration:

• Expand your product line or service offerings.
• Reduce your dependence on one customer to ensure your largest customer only accounts for less than 15% of all revenue.
• Broaden your customer base by considering new geographies, industries, and target audiences, if possible.

Strategies if Customer Concentration is Unavoidable:

• Introduce or restructure long-term contracts with significant customers to make it more challenging for customers to switch to a different company abruptly.
• Integrate into customers’ workflow processes, ERP systems, design and development processes, etc. Make yourself so “sticky” that it would be painful to switch to a competitor.
• Provide unparalleled customer service. There is no better or more sustainable competitive advantage than excellent customer service.
• Intellectual Property: Develop patents and other intellectual property rights that are critical to your customers’ success.

If you are interested in learning more about ACT’s sell-side services, use the following links: 

• M&A Auction Process 
• Sell-Side Services