High Customer Concentration

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

2yrs ago

High Customer Concentration

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

275 Views

reply by an intermediary 2yrs ago
in New York, NY, USA

It would be beneficial to investigate the duration of the relationship with the key customer. How long has this customer been with the company, and what has sustained that relationship for this period? Longevity can often indicate a stable demand and a strong partnership, which could mitigate some concerns - but nevertheless, there should be deal structuring tied around this. Equally important is to inquire about the existence of any long-term contracts with this client. If such agreements are in place, it would be worth reviewing them. It can also help to give you a better understanding of the expected future revenue and any terms that could affect the business’s operations and of course, your potential investment.

reply by a searcher 2yrs ago
from IESE Business School in Barcelona, Spain

it's not only the concentration but the number of customers, 2 customers? My instinct would be to walk away immediately. Unless there is a veeeeery good reason to think that you can build a solid customer base or if you can buy very cheap because of that.