Not From Concentrate!

client concentrations

Client concentrations may be the curse of M&A transactions. They cultivate uneasiness with buyers due to the potential loss of revenue, and raise significant concerns with major lending institutions. If a substantial percentage of a business’s revenue is generated by a limited number of clients, buyers tend to have apprehension regarding future cash flows and withdraw from a potential sale. In my experience, it has always been difficult to turn away business in order to balance uneven client concentrations, especially in the start-up and growth phases of a business. However, business owners may prevent a future potential deal killer and value reducer by identifying the issue, knowing the long-term effect and solving the problem over time, including:

  • Focusing on profitability rather than revenue from a large client; the risks taken with high concentrations should be rewarded with greater profitability;
  • Developing strategies to mitigate client concentrations: set goals for reducing the percentages, increase sales to other clients;
  • Considering an acquisition; and
  • Entering new markets, begin diversifying revenue as quickly as possible.
Client concentrations are not an easy problem to solve; however, taking the steps to manage the risks will ensure the rewards outweigh the risks.