Risks of Profit Concentration in Business

Customer concentration will cost you millions. If Walmart is your only customer, expect a massive valuation discount. If your top 3 customers make up 80% of your revenue, expect the same. Buyers price concentration risk into every offer. Why? Because they know what you might not want to admit: Losing one major customer could sink your entire business. I recently met with a manufacturer whose largest customer represented 60% of their revenue. That single relationship was costing them 40% of their potential valuation. The math is brutal but simple: Diversified revenue streams = premium multiples Concentrated customer base = discounted offers This isn’t something you fix during the sale process. This is something you bake into your strategy from day one. Start today: -Pursue smaller, diversified customers -Enter new market segments -Create contractual protections with key accounts -Build recurring revenue where possible -Your future buyer will thank you. Your bank account will thank you more. What percentage of your revenue comes from your largest customer?

I advised an entrepreneur over the weekend on the need to switch up his customer concentration risk (CCR) as 80% of his revenue comes from a single source.   That’s a red flag for a business, as it would urgently need to diversify its client base.   𝐖𝐡𝐚𝐭'𝐬 𝐂𝐂𝐑? It's the level of revenue risk a company has as a result of relying on a small pool of customers.   Thus, the bigger the client(s), the greater the risk the company’s revenue holds. 𝐇𝐨𝐰 𝐭𝐨 𝐜𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐞 𝐂𝐂𝐑? a) Identify the top customer's revenue over the last year. b) Divide that by the total revenue for that year. c) Multiply by 100. Example: 80% revenue from one client signals high CCR—not a good place to be. Having a high CCR is like a ticking time bomb and can be detrimental to the business, as losing that client can erode cash flow, revenue, and profit. It could also affect the ability of the startup to negotiate for price increments, as it would be under constant fear that key customers could walk away and affect its margins. Notably, a high CCR makes a startup less attractive to investors, possibly leading to a reduced company valuation.   Diversification and mitigating CCR are essential strategies for startups aiming to enhance resilience and appeal to potential investors.   Avoid CCR if you can, but if you find yourself in that situation, take steps to diversify.   #StartupAdvice #RiskManagement #InvestmentInsights #BusinessStrategy 💼

If one customer makes up more than 25% of your revenue… 🚨 You don’t own a business. You own a liability. In M&A, we call this a deal killer. You might trust the relationship. You might say, “They’d never leave.” But here’s what a buyer sees: ◦ A single point of failure ◦ No leverage if that customer tightens the screws ◦ High risk the revenue disappears post-acquisition I’ve seen deals fall apart in diligence not because the business was weak— but because it was overexposed. Buyers don’t pay full price for risk. And customer concentration is one of the biggest red flags. So what can you do? ▸ Land smaller clients to balance your mix ▸ Upsell mid-size accounts to dilute dependence ▸ Document customer touchpoints to ease buyer transition fears The goal isn’t perfect diversification. It’s plausible resilience. → More than 12 months from an exit? You’ve got time to fix it. → Less than that? You need to reframe and mitigate—fast. Want to see your customer risk the way a buyer would? Grab our Sellability Checklist: [Link in comments] #MandA #ExitStrategy #BusinessValuation #CustomerConcentration #DealRisk #FounderAdvice #Entrepreneurship

Buying a business? Check this before you regret it I have seen buyers acquire businesses doing $10 million in revenue only to realize $4 million came from one customer. That is not a stable business. Revenue concentration is one of the biggest risks in M&A. If one or two customers make up most of the revenue, you are not buying a business. You are buying a gamble that those customers will stay. Before you close, ask yourself: What percentage of revenue comes from the top one or two customers? How locked in are they? Contracts or just handshakes? What happens if they leave right after you take over? A real business does not rely on one relationship to survive. Do not overpay for risk. Know what you are buying. Follow for more M&A content