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Customer Concentration

Often, an entrepreneur in the aerospace and defense industry will start a company to support a specific OEM or major program, and then build their business on that foundation. But even after years of being in business, that original OEM or program will often continue to represent a large portion of the company’s revenue. While this phenomenon occurs in many industries, it is particularly common in aerospace and defense where new entrants are likely to have a substantial proportion of their business reliant on a single customer or program.

Aerospace is an industry driven by OEM programs. When demand in specific OEM programs fluctuates even a minor amount, the fortunes of small suppliers with program or customer concentration can swing dramatically. Accordingly, from the perspective of a potential buyer, a highly concentrated revenue stream presents a concern over the riskiness of the future performance of the business. This results in a lower price for the seller.

Over the past 21 years, we have seen two successful approaches to deal with this issue. The best is to broaden the customer and program base. This is easier said than done; it typically takes years, if not decades, to do this successfully in the aerospace and defense industry. However, if the founders focus on this as a key value driver right from the outset, they can resolve it by the time they want to retire. In the alternative, if the business is customer or program concentrated when the owners decide to sell, they will need to find a buyer who will not substantially discount the value of the business because of this. To do that, the sellers need to carefully scan the buyer landscape and target those who view the Company’s customers and programs as complementary to their own portfolios, which would ultimately diversify the revenue stream of the combined enterprise.

Finding the right buyer for a concentrated seller in the aerospace and defense industry is not an easy task. However, it is the only strategy we have seen that has consistently enabled concentrated aerospace companies to sell for favorable prices over the past 21 years.

Have a great day everyone.

Kevin Gould
Managing Director, Aerospace