Business Planning: Customer Concentration

Business Planning: Concentration Risk

Author: Brandon Jordan, CFP®, CHFC®, CEPA®, CVGA®, CLU®, MSA, EA | CEO of Impact Advisors Group

If we desire to improve the odds that our business wins long term and achieves a meaningful value, it’s essential that we build up our defense against threats, both internal and external. This series focuses on the internal threats, what they are, what IMPACT they have, and how to mitigate exposure to each of them. The top internal threats are as follows:

1. Owner Dependence

2. Key Employee Dependence

3. Unplanned Events

(a) Death
(b) Disability
(c) Divorce
(d) Distress
(e) Disagreement

4. Supplier / Vendor Concentration

5. Customer Concentration

What is Customer Concentration Risk?

Customer concentration occurs when a large part of a company’s revenue comes from a single or small group of customers/clients. On one hand, it can make delivering on promises easier. On the other hand, it can result in tremendous unpredictability and even result in a business’ failure. 

Why Does it Matter?

A business that has an overreliance on one customer (or a few customers) will soon find itself at a serious disadvantage or worse. There are many things that can go wrong.

  • An expected loss of a large percentage of the business’ revenue. How would this impact making payroll, paying AP, or honoring debt service covenants?
  • A reduction of bargaining power if/when the customers realize the impact that their departure would have on the success/failure of the business. This can result in reduced margins/profitability over time.
  • A reduction in value as buyers often perceive customer concentration as a risk to the business’ stability and future profitability.   
  • Enhanced vulnerability to economic downturns. This business is now subject to, and heavily impacted by, the economic risks of the specific client(s). 

What Should We Do?

Diversify. Actively seek to cultivate a broader range of customers. Segment by industry, geography, and size. IAG recommends that no single customer should account for more than 20% of the business’ revenue.    

Our Commitment to You

IAG is committed to helping its clients avoid such undesirable outcomes by helping to identify the salient threats and takes the steps to mitigate their negative impact! IAG believes that this great country and its citizens will benefit greatly by having more successful family business.

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