Valuing a business that depends on one major customer

Why one customer changes the value

Picture two businesses with the same profit last year. In the first, the largest customer buys about a tenth of everything sold. In the second, one customer buys more than half. On paper they earn the same. To a buyer they are very different businesses.

A business is valued on what it is expected to earn in future and on how confident a buyer can be about those earnings. When one customer accounts for a large part of the profit, a single decision outside the owner's control can change the whole picture. The customer might move to a competitor, bring the work in house, run a new tender, merge with another group or simply ask for a lower price at the next renewal. Each of those risks passes to whoever owns the business.

This is usually called customer concentration risk. It does not make a business bad or unsaleable. Plenty of sound businesses grew alongside one large client, and that client is often the reason the business exists at all. It does mean a valuer has to look past the headline profit and ask how secure that profit really is.

How a valuer measures the dependence

No single figure settles it. A valuer builds a picture from several angles, and the records you keep make a real difference to how clearly that picture comes through.

Share of revenue and share of profit

The starting point is the share of revenue from the largest customer, and from the top three to five customers, over at least three years. Then comes the more useful question: how much of the gross profit does that customer generate? A large customer on thin, negotiated margins can be a big share of sales but a smaller share of profit. The reverse also happens, where a long-standing client pays well and quietly carries most of the overheads.

The agreement

A written agreement with a fixed term, agreed pricing and limited rights to walk away gives more comfort than a purchase-order relationship that can end at any time. A valuer reads the term, the renewal and termination provisions, any minimum volumes, and whether the agreement can pass to a new owner. Some agreements let the customer end the arrangement if the business changes hands, and that matters a great deal when a sale is in view.

The relationship and its history

Ten years of renewals through different contact people suggests the customer values the service, not just one person. A relationship that runs entirely through the owner, with nobody else in the business known to the customer, is more fragile. Past behaviour counts too: whether the customer has cut volumes before, how prices moved at each renewal and how quickly invoices are paid.

The customer itself

A financially strong customer reduces the risk of not being paid, but not the risk of losing the work. Large organisations often re-tender on a set cycle, change suppliers after a merger or trim their supplier panels. A valuer considers the customer's own position and what is publicly known about its plans.

Where the risk shows up in the valuation

Concentration risk is built into the method itself, not tacked on as a guess at the end. How it shows up depends on the approach the valuer uses.

• Capitalisation of earnings. This is the most common approach for a profitable small or medium business. The valuer settles on maintainable earnings, then applies a multiple that reflects risk and growth. Concentration usually lowers the multiple. If the major customer's volumes look unlikely to hold, the valuer may also adjust the maintainable earnings figure itself.
• Discounted cash flow. Where a forecast is reliable enough to use, the valuer may model scenarios, such as the customer staying, reducing its volumes or leaving, and weight them. Another option is a higher discount rate to reflect the extra uncertainty.
• Net assets. If earnings are highly uncertain, the value of the tangible assets can act as a floor and carries more weight in the conclusion.

A good report shows its working. You should be able to see the concentration figures, the contract terms relied on and why the valuer made the adjustment it did. That reasoning is what lets you and your adviser test the number.

Sale terms compared with market value

In a real sale, buyers often deal with a major customer through the deal terms as well as the price. They might ask for part of the price to be deferred, paid as an earn-out that depends on the customer staying, or held back until a contract is renewed. A market value conclusion is a single price on typical market terms, so these protections are not added on top. For tax purposes, the ATO describes market value by reference to a hypothetical sale between a willing but not anxious buyer and a willing but not anxious seller. The concentration risk therefore has to be reflected in the value itself.

An illustrative example

The point of the example is not the exact numbers. It is that two sets of identical accounts can support different values once the source of the profit is understood.

What an owner can do about it

If you are planning a sale, a succession or a restructure in the next few years, concentration is one of the few value drivers you can work on directly. None of these steps is quick, and each is worth talking through with your accountant and, for anything contractual, your lawyer.

1. 01Measure it properlyRun revenue and gross profit by customer for the last three to five years. The real figures often surprise owners, in either direction.
2. 02Put the arrangement in writingA clear written agreement with a sensible term can reduce uncertainty. Be wary of accepting poor pricing just to win a longer contract, because value follows profit, not paperwork.
3. 03Check what happens on a change of ownerAsk your lawyer whether the agreement can pass to a buyer, or to a new entity in a restructure, and whose consent is needed.
4. 04Spread the relationshipIntroduce the customer to a second person in your business, so the account does not depend on you alone.
5. 05Grow the rest of the bookWinning other customers lowers the share even if the major customer stays the same size. That is usually healthier than shrinking a good account.
6. 06Keep the evidenceRenewal history, correspondence about future work and the customer's payment record all help a valuer judge the risk fairly.

What it means for a 30 June 2027 valuation

From 1 July 2027, the 50% CGT discount for individuals, trusts and partnerships is replaced for gains that accrue from that date. Under the transitional rules, Australian resident individuals, and trusts with at least one eligible beneficiary, are generally treated as if they sold and reacquired relevant CGT assets at market value just before 1 July 2027, so the relevant valuation date is 30 June 2027. A company’s own post-CGT assets are outside this rule, because companies cannot use the 50% discount.

A valuation is one way to work out the market value at that date. It is not the only way: an apportioning method may be an option once one is made, and the choice can wait until the tax return for the year the asset is later sold. Whether a valuation suits your situation is a question for your tax adviser.

If a valuation is used, the customer position is assessed as it stood on 30 June 2027. In general, a valuation as at a past date looks at what was known or reasonably knowable at that date. A contract that was already out to tender, or a customer that had signalled it was leaving, is part of the picture. A loss that nobody could reasonably have foreseen at the time generally is not.

A valuation as at 30 June 2027 is prepared after that date, once your records to 30 June 2027 are available. You can book your place now. If one customer is a large part of your business, it helps to start keeping the evidence described above now, so the position at that date is well documented.

What we need from you

When Independent Business Valuation values a business with a major customer, we ask for a few extra items alongside the usual financial statements:

• Revenue and gross profit by customer for at least three years
• The current agreement with the major customer, and any earlier versions
• Recent correspondence about renewals, pricing or future volumes
• An aged debtors listing at the valuation date
• A short note on who manages the relationship, on your side and the customer's

Documents come only through the secure upload link on your matter, never by email and never through the website. Independent Business Valuation fees follow the size and structure of the business:

• One business or ownership interest with annual turnover under $10 million: one fixed fee of $999 + GST for a full valuation report
• Groups, several interests or turnover over $10 million: Quoted in writing

The fixed fee applies once we confirm the interest, purpose, structure and records fit the fixed-fee scope. Anything outside it is quoted in writing before we start. Fixed fee, confirmed in writing before we start. No hourly billing and no surprises.