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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.

Impact Advisors Group LLC (“[IAG]”) is a registered investment advisor offering advisory services in the State of Massachusetts and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site. The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Impact Advisors Group disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose. IAG does not warrant that the information on this site will be free from error. Your use of the information is at your sole risk. Under no circumstances shall IAG be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided on this site, even if IAG or a IAG authorized representative has been advised of the possibility of such damages. Information contained on this site should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.