When one customer is a third of your business

When one customer is a third of your revenue, a buyer is pricing the chance that the customer walks out after settlement, and the price reflects it. That is not a judgement on the customer or on you. It is arithmetic about what happens to the business if one contract ends.

This piece is about how a buyer and their lender read that risk, where the 20 per cent line on my readiness check comes from, and what an owner can change in the year or two before a sale.

Why a buyer and a lender price it

A buyer is paying today for earnings they expect to receive over the next several years. If a large share of those earnings comes through one customer, the buyer is really buying two things: a business, and a bet that one relationship survives a change of owner.

Take an illustrative example with round figures. A business turns over $2 million and one customer is $700,000 of it, which is 35 per cent. Rent, wages and the rest of the overheads do not shrink much if that customer leaves. So if that one account contributes, say, $250,000 towards overheads and profit, and the business earns $400,000, losing it does not cut profit by 35 per cent. It cuts it by more than half. Those figures are illustrative only, but the shape is real: concentration hits profit harder than it hits revenue.

The buyer's lender does the same sum. A lender is lending against earnings, and it has to think about what the business earns without that customer. Where the answer is a lot less, it may lend on the lower figure, ask for more security, or decline. A buyer who cannot borrow the price cannot pay it, whatever they think of the business.

That is what the hint on my readiness check means when it says concentration is "priced as risk, dollar for dollar".

How it is read

A buyer's accountant does not stop at one percentage. These are the things I would expect them to look at, and the questions behind each.

The top one and the top five. The share of revenue from the single biggest customer, and from the five biggest together, across three years. A business with one customer at 30 per cent and four tiny ones reads differently from one where the top five are each 10 per cent. Watch related customers too. The accounting standard for listed entities treats a group of entities under common control as a single customer, and a buyer will do the same: three subsidiaries of one group are one customer.

The contract terms. Is there a written agreement at all? How long does it run, what notice ends it, and are prices fixed, reviewed or open? Business Queensland's due diligence guidance lists contracts with suppliers and customers among the documents a buyer's lawyers and accountants should inspect.

Assignment and change of control. If the business is sold as assets, the contract has to move to the buyer. Business Queensland's list asks, for supplier contracts, whether the seller can transfer the contract without the other party's consent, and the same question applies to your customer contracts. If the business is sold as shares in a company, look for a change of control clause, which may let the customer end the contract when the ownership changes. Either way, the clause decides whether the customer gets a say in your sale.

How long it has run. Ten years of steady orders tells a buyer more than a customer won last year. So does the pattern: whether the share is growing, stable or falling.

Whether it is with you. This is the question that weighs heaviest with a buyer, and the hardest to answer on paper. If the customer's buyer rings your mobile, knows your family and has never dealt with anyone else in the business, the relationship may not transfer. Business Queensland warns buyers that "the personality of the seller may be the success story". The owner side of this is covered in owner dependence and your price.

Where the 20 per cent line comes from

My free readiness check asks whether your biggest customer is under 20 per cent of revenue. That is the check's line. It is not a law, a bank rule or an industry standard, and a business at 22 per cent is not suddenly unsaleable.

I use 20 per cent because it is roughly the point where losing one customer stops being a bad year and starts changing what the business is. Below it, a buyer can absorb a loss. Above it, they start to structure the price around it.

For a reference point from outside broking, AASB 8, the accounting standard on segment reporting, requires an entity to disclose when revenue from a single external customer is 10 per cent or more of its revenue. That standard applies to entities whose shares or debt are traded in a public market, not to a private business. It shows where the accounting profession starts paying attention. It does not tell you what a buyer will pay.

Both sides of it

The owner's case. The customer has been with you for years, has never missed a payment, and switching suppliers would cost them time and money. All of that can be true, and a buyer should hear it with evidence: order history, payment record, and any cost to the customer of moving.

The buyer's case. The relationship was built by you, you are leaving, and the buyer has no way to test loyalty until after they have paid. Long tenure lowers the risk. It does not remove it, because what kept the customer may have been you.

Both are reasonable. The gap between them is closed by paperwork and by time, not by argument at the negotiating table.

What you can do in 12 to 24 months

Put it in writing. Business Queensland's own preparation list tells owners to use formal, written contracts with customers and suppliers rather than handshake or verbal agreements. A written agreement with a term, a notice period and a price mechanism gives a buyer and a lender something to assess. Have your solicitor draft or review it.

Check the assignment clause. Ask your solicitor whether the contract can pass to a buyer, and what consent is needed if it is sold as assets or as shares. A clause that lets the agreement move with the business, or needs consent that cannot be unreasonably refused, is worth more in a sale than one that gives the customer a free exit.

Give the customer a second contact. Introduce someone else in the business to the account and let them run it: the orders, the quoting, the problems. A buyer will ask the customer, or ask your staff, who they deal with. Twelve months of someone else's name on the emails is evidence. A promise is not.

Grow the rest. The cleanest way to bring a share down is to win more work elsewhere. The share falls and the earnings rise at the same time, which is the combination a buyer pays for.

Do not shrink the big one. Dropping or discounting a large customer to make the percentage look better takes earnings out of the business. A buyer pays for earnings. Lower concentration at the cost of lower profit is a trade, and it is not one I would recommend.

There is more on how concentration sits among the other numbers a buyer looks at in the eight numbers every buyer checks first.

Where a broker fits

I am not your solicitor, and the contract and its assignment terms are their work. What I can do is tell you how a buyer and their lender are likely to read your customer list as it stands, and which of the changes above would move that reading. If you want to see where concentration sits against the other factors in your price, start with what your business is worth.