Chris Knott: The risk of reliance on a major customer – a cautionary tale

Chris Knott, Director at Leonard Curtis, has spent his career helping businesses navigate some of their toughest moments. With a sharp eye for risk and a practical approach to problem-solving, he’s seen firsthand how over-reliance on a single customer can spell disaster – and what can be done to stop it.

“Businesses heavily reliant on a single customer face significant risks.

Leonard Curtis recently supported the fall out of two cases where each company lost over 90% of their revenue when their primary customers withdrew orders.

One had no contract, allowing the customer to leave freely, while the other faced a legal dispute over contract termination. In both instances, the sudden revenue loss led to cashflow crises, with one company unable to sustain operations or fund litigation.

Whilst a loyal customer is always something to strive for, having reliance on one can have catastrophic effects. These effects include:

• Power imbalance – In these situations the customer will often find themselves in a strong position. They know that their custom is keeping the business viable, and they can therefore hold all the bargaining power.
• Size of the parties and respective fighting funds – Where the contract was ended, the company directors sought legal advice which suggested the contract had not been properly terminated. The customer took a robust approach, making significant counterclaims against the company. In this case the customer was significantly larger than the company and had much deeper pockets to fund legal action.
• Growing to fit the customer – As customer demand grows, it can be tempting to grow the business to meet their demand. Increasing overheads to meet the new and increased demand of a loyal customer would seem to be a sensible business choice, particularly where a contract is in place for future business, however there will likely be significant cost implications to consider.
• Cashflow risk – An income stream suddenly being terminated will cause difficulties. Where a company has grown to meet the demands of its customers, it cannot simply make cuts. In business it is much easier to grow than it is to reduce in scale. The costs of redundancies, moving to smaller premises and making cuts are expensive and time consuming, especially when the company has had its income source significantly restricted.
• Continuity risk – Customer requirements can change, they can reduce orders or look elsewhere. There is also the risk that the customer finds themselves in difficulty and through no fault of the company the customer is unable to continue to place orders.

So – what lessons can be learned?

In both cases the directors had enjoyed a good relationship with their customer, until the relationship ceased.

They did not see the issue coming and with hindsight would not have allowed one customer to have become so pivotal. What advice can be given to avoid others having the same issues?

• Have strong contracts – Whilst a contract will help, they are not always the sole solution. Having a robust contract will at least make the customer think twice before suddenly stopping trade.
• Keep the customer under review – Where the customer is so key to the future of the company, remaining aware of their financial position is fundamental. If payments start to fall behind, find out why. Investing in a financial monitoring service can also flag early signs of distress.
• Diversify – Consider new products and services which can reduce the dependency on a single client or service. When the company is doing well and making money, that is the time to invest for the future.
• Consider other customers – Unless exclusivity restrictions prevent it, attracting new customers will be key to the future success of the company.
• Prepare for the worst – A contingency plan is vital; having a strategy for if the worst should happen, but hopefully never having to use it. This could be how to access new working capital, negotiating with suppliers or accelerating new business.

The loss of a principal customer can be devastating, but proactive planning can mitigate risks. While businesses cannot control customer decisions, they can prepare with diversification strategies and contingency plans.

The key when trouble appears is to take proper advice and remember that whilst early advice is always best, it is never too late to seek professional guidance.