Guard Against 1 Client Getting Too Big and Powerful?

While having one to three large anchor customers is generally not problematic, it is essential to maintain a lean and dynamic cost base that aligns with those clients. This ensures that if they churn, you can quickly reduce the associated costs of floor space, licenses, and personnel.

Establishing a separate company for each major client is often seen among businesses as a way of mitigating risk from those larger clients, but I find this approach to be too costly and generally unnecessary.

When selling your company, potential buyers may indeed be concerned about dependency on one or two large clients, particularly if they account for more than 15% of total revenue. However, if these contracts are profitable with strong terms and minimal downside risks such as exit costs or damages for consequential loss, this concern can be mitigated.

If you aim to prevent any single client from becoming too dominant, focus on your sales and marketing strategy. For example, when investing into one of our portfolio companies, the primary goal was to grow the business and reduce dependency of one major client out of 120 live customers we inherited. Five years later, with over 550 business customers and 860% revenue growth, revenue directly or indirectly from this one larger account amounts to less than 15% annual revenues.

Always remember that you have the option to refuse overly dominant business relationships by politely explaining your concerns. Don’t ever be afraid to say “No Thank you” and walk away if the deal doesn’t feel right.