The anchor customer: growth, concentration and a three-week deadline
Dan is CEO of a 280-person specialist packaging manufacturer with £46m turnover and a 7% EBITDA margin. Its largest customer, 31% of revenue, has offered a three-year contract worth £19m a year, but it requires a new production line (£6.5m capex), a 12-month exclusivity clause barring Dan from serving two competitors, and unit prices 9% below the current average. The board has £4m cash and a £3m undrawn facility. Dan's operations director says the line can be installed in nine months; the finance director warns that the contract would take leverage to 2.8x EBITDA and that the exclusivity clause would remove the segment that grew 22% last year. Two other customers have indicated they may move to a rival if capacity is prioritised for the new contract. The board meets in ten days and the customer wants a decision in three weeks.
1. Evaluate the strategic logic of the offer. What must Dan and the board establish before deciding, and which analysis is most decisive?
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The offer is not one decision but four bundled together: a volume commitment, a price reduction, a capital investment and a restriction on future markets. Each has a different risk profile and each should be valued separately.
Concentration. The existing customer is 31% of £46m, roughly £14.3m. If the new contract is additive, pro-forma revenue is around £65m and this customer becomes roughly 51%. That crosses the threshold where one buyer sets your terms, your payment cycle and your capacity plan. The strategic question is not 'can we win it' but 'what does our business look like in year four if we do'.
Economics. A 9% price reduction means the contract must be justified on contribution after variable cost, not on revenue. Dan needs the unit-cost build-up, the line's depreciation and financing cost, the payback period, and the volume at which the line breaks even. Leverage at 2.8x against typical covenant levels of 3.0x leaves almost no headroom; a single bad quarter becomes a covenant event.
The exclusivity clause is the decisive item. It removes the segment growing at 22% - the only part of the business with demonstrated momentum - for a fixed price over three years. The opportunity cost should be modelled over the full term, not just year one.
Capability and delivery risk. Nine months to install against a contract start date, with two existing customers threatening to leave, means Dan is trading certain revenue for uncertain revenue. The board must see a sensitivity case: contract won and two customers lost, contract won and ramp delayed, contract lost.
2. Recommend a decision and the negotiating position that goes with it. What would make you walk away?
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Recommendation: do not accept the offer as written, and do not simply refuse it. Counter-propose. The value is in the terms, and the customer has signalled it wants capacity for three years - that is leverage.
The counter-offer should contain:
- Remove exclusivity, or narrow it to the specific product family the customer buys, so the growth segment remains open.
- Restore margin through a price indexation clause and a volume band structure, so the 9% reduction applies only above a committed minimum.
- Share the capital risk - customer contribution to tooling, a take-or-pay minimum, or a phased line rather than £6.5m in one commitment. A smaller first phase preserves optionality and keeps leverage below 2.5x.
- Protect against the two departing customers by sequencing capacity so existing service levels are contractually protected during installation.
Walk-away triggers, agreed by the board in advance: leverage above 3.0x at any point in the sensitivity cases; exclusivity covering the growth segment on any terms; no indexation over three years; or a price below cash contribution after capital charges. If the customer refuses all four, decline - a contract that removes your only growing market and consumes your balance sheet is a strategy of managed decline, not growth.
Reasoning discipline: the board should decide the walk-away conditions before negotiating, not during, because the pressure of a three-week deadline and a marquee customer is exactly when judgement slips.
3. How should the board govern this decision? Address information quality, conflicts, risk appetite and the record.
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Process is the board's only real protection here.
Information. The board needs a business case, not a proposal: three-year cash flow with and without the contract, sensitivity analysis on price, volume and ramp, a covenant test under each scenario, legal review of the exclusivity wording, a capacity model and a customer concentration assessment. If the executive cannot produce the downside case, the decision is not ready.
Conflicts and challenge. The CEO is the sponsor of the deal and has a personal stake in growth. The board should appoint a designated challenger - typically the audit committee chair or a non-executive with sector experience - and take independent financial or legal advice on the exclusivity clause. Dissent should be recorded, not smoothed away.
Risk appetite. Test the proposal explicitly against the board's stated risk appetite: concentration limits, leverage limits and market diversification. If the deal breaches them, the board must either change the deal or formally change the appetite and explain why - which is a decision worth minuting.
Decision rights and timing. Agree delegated authority for negotiation, with any material change to the four terms returning to the board. Ten days is enough for one well-prepared meeting and one follow-up; three weeks is enough to negotiate, but not to redo the analysis.
Record and disclosure. Minute the decision, the conditions, the dissent and the monitoring triggers. Add customer concentration to the principal risks in the annual report if the deal proceeds, and pre-agree how the two existing customers and the lender will be communicated with. A board that only reviews the upside is not governing; it is ratifying.