How does relying on one major customer affect my business value?

Why does one customer weigh so heavily on value?

Industrial businesses often grow around one account: an OEM, a retailer's distribution centre, a mine site or a 3PL's anchor client. The work can be steady for years. But one procurement review, retender or change of ownership at the customer can end it, and the factory, the fleet and most of the staff are still there the next morning.

Because the fixed costs stay, the share of profit at risk is usually higher than the share of revenue. A large customer also has bargaining power, which often shows up as a thinner margin and longer payment terms on that account than on the rest.

What makes a dominant customer less of a risk?

• A contract with years left to run, a record of renewals, and no right to terminate for convenience on short notice.
• Terms that survive a sale of your business, so the customer's consent is not needed on a change of control.
• Price reviews that pass on material, energy and wage increases.
• Switching costs: approved supplier status, customer-specific tooling or systems, site inductions, or a lengthy requalification process.
• Several people in your business dealing with several people at the customer, not only the owner.
• A customer with a long outlook of its own, such as a mine with years of life left or a brand with stable volumes.

How do valuers and buyers price the risk?

A valuer reflects it once. A loss that is expected is taken out of maintainable earnings; a risk that may or may not happen is reflected in the capitalisation rate or in weighted scenarios. Doing both for the same customer would overstate the discount.

Buyers often deal with it in the deal itself, with part of the price deferred or paid as an earn-out if the customer stays. A valuation for a shareholder buyout, an estate or a tax purpose usually has to settle on a single figure at one date, so the risk is priced into that figure. Our article on customer concentration and business value goes further, and you can request a quote for a formal valuation. We confirm the fee in writing before we start. No hourly billing.