High Client Concentration

by a searcher

3 months ago

I'm evaluating a potential dealing the manufacturing sector that presents a significant concentration risk: 60-70% of its revenue comes from just one customer. Imagine a scenario similar to a local gasket manufacturer supplying to an automobile producer. While typically such concentration would be a deal breaker for many, there are compelling factors to consider:

Critical Dependency: The customer relies solely on this supplier for a critical component but represents a minor fraction of their total production costs. Suggesting a lower incentive for the customer to switch suppliers.

Barrier to Entry: There's minimal competition. There is a high entry barrier, making it less likely for new entrants to disrupt this relationship.

Expansion Potential: The facility is well-positioned to diversify its product line for retail and online sales with minimal capital investment, presenting an opportunity to improve revenue diversification.

Would love to hear thoughts from the community on this scenario. Are there potential pitfalls I might be overlooking? If anyone has come across case studies, podcasts, or discussions that delve into similar investment scenarios, could you please point me towards those resources?

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8 comments

intermediary from City University of New York, Bernard M. Baruch College

I am selling a company that has the same risks/opportunity. One company accounts for greater than 90% of my business, but it's a huge account and I have a brand that cannot be purchased through anywhere else in quantity. I also have a large pricing advantage. Some people would look at this as opportunity and others would look at it as a risk. I am going to generate $25 million in sales this year, so I view it as opportunity

3 months ago | like reply | 1 like

searcher from IE Business School

That was a clear deal breaker for us when sourcing deals. When a customer becomes aware of their significant leverage over a supplier, they may exploit this position to negotiate more favorable terms, This could include squeezing margins by demanding lower prices or imposing stricter contractual terms. In extreme cases, the customer might even attempt to acquire the supplier at a price significantly below its true value. With limited bargaining power the supplier may find it difficult to implement price increases, even in response to rising costs or inflation. Also do not underestimate the cost difficulty in scaling, while current setup for this customer may be profitable, expanding into new markets or diversifying the product line requires careful planning, investment, and execution, with no guarantee of success.

High Client Concentration

by a searcher

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