Customer concentration: measure the margin at risk

A customer representing 20 % sales merits analysis, but this percentage does not describe all the risk. I would look at relationship duration, clauses, margin, collections and operational dependency. Several subsidiaries of the same group can form a single economic exposure. Conversely, autonomous purchasing decisions may require a more detailed reading than legal grouping.

Historical concentration and future risk must be distinguished. A large customer may be stable, while a diversified portfolio may have high churn. Due diligence must explain the mechanisms that support or weaken the relationship. The top ten customer ranking is a starting point, not a conclusion about the value of the business.

I would reconcile the sales with accounting then group the accounts with written agreements. Changes in codes, distributors and acquisitions can disrupt the series. A distinction must be made between invoicing, end customer and contractual consideration when the business model requires it. One-off income must remain identifiable.

Comparisons must use the same scope and the same periods. A client may appear more important if other activities have been sold. Amounts and proportions are both useful. I would supplement the turnover by contribution margin and payment terms, because high exposure in sales does not necessarily correspond to the same exposure in profit or cash.

I would read the duration, termination, change of control and exclusivity clauses, with the help of counsel for their interpretation. A long relationship does not equal a firm commitment. A contract lasting several years may include exit possibilities. Renewal intentions must be separated from documented commitments.

Operational risks can be also significant: dependence on a contact, specific product or dedicated resource. The ability to redeploy costs and the timing of reductions must be examined. A customer loss scenario should not assume that all costs disappear immediately, nor that none can be scaled.

A customer represents 2 M€ out of 10 M€ of sales, or 20 %. One scenario envisages a drop of 40 % in its purchases: the loss of income would be 800 k€. With a contribution margin of 35 % retained for this scenario, the simplified effect is 280 k€. The margin definition must specify which costs actually vary.

This amount is not a historical EBITDA adjustment. It describes future sensitivity, dependent on a hypothetical decline and cost assumptions. It may be supplemented by transition costs or commercial replacement capacity, but these elements must be documented separately.

I would also test other loss levels and timing. A gradual decline sometimes allows resources to be adapted, while a sudden break creates temporary costs. The scenario helps discuss the risk of the investment; it does not prove that the customer will leave or that the company will lose exactly 280 k€.

I would ask for reasons for variations on a client-by-client basis and recent elements that support the relationship. General explanations of satisfaction must be reconciled with relevant orders, renewals or indicators. Direct contact with clients depends on the mandate, confidentiality and agreements; it is not automatically possible or necessary in all missions.

The restitution must show trends, contractual risks and scenarios with their assumptions. A distinction must be made between commercial exposure and debts already owed. Litigation can affect both, but the calculations should not confuse them. Recent sources and reservations must remain identifiable as of the report date.

A tool can bring together client entities, contracts and management responses. I would test the subsidiaries, amendments and contradictory clauses. A clause extraction must indicate its source and not replace the required legal advice. A risk classification can be used to prioritize professional review, not to predict future loss.

In Solenor, the value sought would be a file bringing together trends, evidence and open points. The investment decision belongs to the decision-makers, informed by the team’s analyses. The concentration percentage is only useful when explaining what it means economically.