What is client concentration in an agency?
Client concentration means a large share of revenue depends on a small number of relationships. It is one of the first things a buyer asks about, because a buyer pays for income that continues after settlement. Government guidance for buyers suggests talking to existing customers and reviewing the agreements a business relies on, and concentration is where that work starts.
The same risk works on the supply side. An agency that depends on one insurer, one lender panel, one aggregator, one wholesaler or one consolidator can lose income or margin if that party changes its terms.
Where does concentration show up in different agencies?
The idea is the same in every agency; where it sits is not.
| Agency type | Where concentration can sit |
|---|---|
| Real estate and rent rolls | A few landlords or investor groups owning many managed properties; related-party managements |
| Strata management | A handful of large schemes providing much of the fee income |
| Insurance broking and underwriting agencies | Large commercial accounts; reliance on one insurer's capacity or one binder |
| Mortgage broking | One referral partner, such as an accountant or a real estate office; one aggregator |
| Financial advice | A small group of clients providing most ongoing fees |
| Marketing, digital and creative | One or two retainer clients; one platform or partner program |
| Recruitment and labour hire | One major client or panel arrangement providing most placements or hours |
| Travel | A few corporate accounts; dependence on one consolidator or supplier |
| Customs brokers and freight forwarders | A few importers or exporters providing most shipments |
Why does client concentration lower value?
A large client leaving after settlement removes revenue the buyer paid for, and the cost of servicing it rarely falls as fast. A large client also has bargaining power: it can push fees down or ask for more service. Contract terms matter too. A retainer either side can end on short notice, an agreement that lets the client terminate on a change of control, or a management agreement close to its end date all make a large relationship less certain.
The ATO's guide to market valuation names lack of support for risk adjustments to a capitalisation multiple as a common issue, so a valuer has to show how concentration was measured and why it changed the value.
How is client concentration measured?
A valuer works from revenue by client tied back to the accounts, and looks at:
- ·The share of revenue, and of gross profit, from the largest client, the top five and the top ten
- ·How long each large client has stayed, and whether it stayed through staff changes and fee changes
- ·Contract type, end date and termination rights, including any change-of-control clause
- ·Who holds each large relationship, and whether a second person services it
- ·Margin on each large account, because a big client on thin margins adds less value than its revenue suggests
- ·Related-party clients and managements, listed separately with the fees they pay
- ·Dependence on a single referral source, insurer, lender, aggregator or supplier
Hypothetical illustration: two digital agencies with the same revenue
Invented figures, not market data. Two digital agencies each have $2.4 million of revenue. In Agency A, the largest client provides 40% of revenue on a monthly retainer that either party can end with 30 days' notice, and the principal is its main contact. In Agency B, the largest client provides 9% of revenue, and no five clients together exceed a third of it.
A valuer might treat some of Agency A's largest account as at risk in maintainable earnings, or apply a higher capitalisation rate to the whole agency, and explain the choice. If Agency A's client had instead signed a three-year agreement that continues on a change of ownership, with a long record of renewals, the risk would be lower and the report would say why.
How can you reduce concentration risk before a sale?
Concentration rarely changes quickly, but it can be reduced and documented:
- ·Grow the next tier of clients rather than walking away from a large one
- ·Move large clients onto written agreements with clear terms, and ask your lawyer about change-of-control wording
- ·Give every large client a second contact in the team
- ·Keep a record of tenure, renewals and fee changes for each large account
- ·Avoid winning volume with deep discounts in the year before a sale, because a buyer will see the margin
What do we need from you?
To measure concentration properly, we usually ask for:
- ·Revenue by client for the last three years, reconciled to the accounts
- ·Agreements for the ten largest clients, or management agreements for the largest landlords
- ·Who services each large account
- ·Any insurer, lender, aggregator or supplier agreement the income depends on
What does an agency valuation cost?
Every valuation is a fixed fee, agreed in writing before work starts, whatever the value we reach. The band is set by the annual revenue, excluding GST, of what is valued: a rent roll's annual management income, an insurance or mortgage book's annual recurring income, or the agency's total annual turnover where the whole agency or shares or units in it are valued. Delivery time starts once payment and all required information have been received.
- ·Small Business Valuation: $1,495 + GST where the revenue of what is valued is under $2 million, delivered in 2 business days
- ·Medium Business Valuation: $2,495 + GST from $2 million to $3 million, delivered in 3 business days
- ·Large Business Valuation: $3,495 + GST above $3 million up to $10 million, delivered in 3 business days
- ·Above $10 million: quoted in writing before work starts, with the delivery date agreed before commencement
- ·Expert report for a dispute or court: $4,495 + GST, with the delivery date agreed before commencement
- ·Add-ons: +$495 per retrospective (past) valuation date and +$795 per additional entity