Customer concentration
What is Customer Concentration?
When a Business is said to have a high degree of customer concentration it means a small number of customers generate a significant portion of the total revenue.
During the Financial Due Diligence process, a buyer will scrutinise revenue focusing on concentration, recurring vs. non recurring, contracted vs. non contracted and more. A high level of customer concentration is a red flag for a potential buyer as if a key customer is lost and not replaced it could have significant impacts to margins and earnings.
A high degree of customer concentration needs to be analysed and interpreted with a number of other factors by the buyer. Consider this scenario:
A single customer contributes 25% of the total revenue of a Business;
This customer has been a recurring customer for a number of years; and
This customer has entered into a recently executed contract to continue to receive services from this business for the next 3 years.
The customer concentration risk identified above is less concerning than if this customer was a new customer and there was no executed formal contract or agreement, albeit still something to consider.
PCM Advisory have the knowledge and experience in SME transactions to assist you in your transaction needs. With the skills of a mid market firm and the look and feel of a boutique firm contact us today to book a meeting and see how we can help.
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