IS HIGH CUSTOMER CONCENTRATION A DEAL BREAKER?
As I review companies I do come across certain businesses that show promising characteristics but they sometimes have a customer concentration issue and I wonder whether this is always a deal-breaker or whether there might still be a good business underneath.
I'll include some examples below and would like to see if anyone has had success in operating a company that may have similar issues but makes up for it in other areas.
We have certain companies in South Africa that have integrated themselves pretty well at our local power utility and their entire order book comes from the power utility. These companies work hand in hand with the utility and develop the technical standards that apply to their particular niche so it makes it difficult for new players to enter their niche and I believe the power utility has a corresponding supplier concentration issue. I'm still not 100% comfortable with this situation but I would like to hear from someone else.
We also have many road freight companies which have a number of key accounts which make up 10-20% of revenue per account. These customers are secured with 3-5 year contracts and in some cases the freight companies are the sole service provider, offering an integrate solution. In this case, I take some solace in the fact that these accounts are on fixed contracts and there is a strong integration element but I have seen transport companies changed almost overnight at my previous employer so I am not sure how secure I feel about acquiring this type of business.
I look forward to seeing how others think about this.