When Does Customer Concentration Become an Advantage? – April 2022 M&A Activity

One of the more pernicious characteristics of many printing companies is the reliance on one or two customers that become the majority source of revenue. A loyal key customer can be the lifeline when a company is starting up. The key customer’s demands drive the company’s strategic direction, inform capital equipment investment decisions, enable the development of particular internal skill sets, and lead to product specialization. When it comes time to sell the company, customer concentration often results in a small universe of buyers restricted to those willing to take on the risk inherent in the situation. Buyers may seek discounts on enterprise value or at minimum require some form of risk mitigation in the structure of the purchase.

Occasionally the laser-like focus on serving a customer is not a risk for a buyer, but rather the very reason that the transaction makes sense. We are reminded of the long-term strategic decision made by TC Transcontinental in 2014 to transition out of the company’s traditional publishing and publication printing services and move aggressively into the flexible packaging segment. The company acquired by TC Transcontinental, Capri Packaging, had one customer, its owner Schreiber Foods, that provided 75% of revenue. To gain entry to the new market segment with one fell swoop, TC Transcontinental paid dearly at 1.85 times acquired revenues. Risk was mitigated with a ten-year commitment from Schreiber Foods, the seller and now the number one customer of the spun-off printing operation (see The Target Report – March 2014).