Time to Break Your Concentration?

There are two ways to build a printing company’s top line: by increasing share of market, and by increasing share of customer. Successful companies are good at doing both.

But, a company positioning itself for sale may find that increasing share of customer has a serious downside. This happens when one account is producing a disproportionate share of the business. It’s called customer concentration, and it can hurt marketability for the seller.

How do we define “concentration,” and why is it too much of a good thing? A customer yielding 15 percent or more of sales represents a significant concentration of business—an advantage as far as revenue is concerned, but a potential red light to a buyer.

A buyer knows that a concentrated account won’t necessarily survive the closing of a deal. It can be lost to ordinary competition prior to the sale. It may follow its account representative if the salesperson chooses to leave the selling company. Or, the account may not want to do business with the prospective new owner. The results: a perception of risk and a lower valuation for the selling company as the buyer’s hedge against the risk.

It’s not an easy situation to remedy. You can’t, after all, “fire” the concentrated customer. What you can do, as a part of a long-term strategic plan, is to ease the concentration by adding volume that diminishes its overall share. You can grow organically by bringing in new accounts, or you can grow by acquisition with a fresh book of business from a company you have purchased. Either way, the percentage of the whole represented by your concentrated customer goes down.

This assumes that you have a window of three to five years to prepare for sale. If you are looking for a quicker exit—say, within six to 12 months—you should recognize that account concentration probably is going to depress your company’s valuation and shrink the pool of potential buyers for it.

But, there can be exceptions. A few years ago, New Direction Partners worked with a selling client whose ties to the concentrated account were especially close. As the deal took shape, the seller, obviously, didn’t want to lose the account; the customer wanted no breaks in production. We brought the buyer into the loop by explaining the situation and pointing out that as long as the relationship didn’t change, the account’s loyalty would leave everyone a winner. We negotiated a contract that bound the account to the new owner for 10 years—a happy ending to the story.

Not all problems of customer concentration can be resolved in this way, but all of them need to be addressed sooner or later. Let a qualified M&A advisor help you understand how much of a good thing is too much while there is still time to do something about it.