Understanding Risks of Market Concentration

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?

One Big Client = One Big Risk You feel great when your largest client keeps giving you more business. Buyers feel the opposite. If more than 25% of your revenue comes from one client, buyers will see massive risk, and any potential deal structure will account for this risk.  If that client leaves, your valuation takes a massive hit. What does that situation (aka customer concentration) mean for you?  → Reduced valuation → Earn-outs tied to sustained client retention → More challenging deal terms  → More time you will be required to stay with the business Instead of waiting for the buyer to reduce valuation based on your customer concentration, take steps now to diversify your customer base. Look for new industries, regions, or markets where you can expand. Strengthen relationships within your existing accounts and work on locking in long-term contracts. Note - Concentration risk isn’t just about customers—it applies to vendors and key employees too. This is one of the first things every buyer looks at. Don’t let this one factor cost you big. #businessvaluation #sellyourbusiness #customerconcentration #exitstrategy #kinected

You've been thinking about customer concentration wrong. Here's why: Customer concentration is a metric that shows what portion of revenue is made up by a given customer or group of customers. The rule of thumb in M&A is that no single customer should be more than 20% of your revenue. Most people think the rule exists solely because customer concentration poses a risk to cash flow—and that’s true. If one customer accounts for 50% of your revenue and they leave post-close, the acquirer is in a tough spot. I often hear owners say something like "Well, we've shown that we can have a good relationship with Walmart for 10+ years. That's not easy!". And, it certainly isn't easy. But here's what you're missing in addition to cash flow risk: customer concentration raises questions about scalability. If you’ve only proven success with Walmart, buyers will wonder, "Can this business scale beyond that?" Does your product work with other mass market retailers like Target, or in different channels like e-commerce, club, grocery, or c-store? By having a diversified customer base and channel mix, you show potential acquirers that your business model is scalable across customers and channels - that is a huge green flag. It also shows that you don't have any unnecessary risk in the event that something goes wrong in one of those customers or channels - another huge green flag. So next time you look at your customer list - don't just look at % of revenue as an indication how risky the relationship is, also consider how it impacts your scalability. --- Follow me for more thoughts, explanations, and stories, in the world of small business acquisition.

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 💼

Are you trying to solve your customer concentration problems? Start by asking yourself the following 10 questions: 1 - What percentage of your revenue is generated by your top 1-3 customers? 2 - How would losing one or more of your top customers impact your overall business? 3 - Have you actively diversified your client base to minimize risk? 4 - Are your major customers in cyclical or volatile industries? 5 - Do your major customers have significant bargaining power? 6 - What strategies have you implemented to reduce customer concentration risk? 7 - How does your customer concentration affect your borrowing costs and access to capital? 8 - Have you explored potential impacts on business valuations due to concentration? 9 - Are there systems in place to maintain and strengthen your relationships with key customers? 10 - Can your business effectively manage post-acquisition customer retention if acquired? Not only will answering these questions help you solve your concentration problems… But potential buyers will ask them anyway. So you might as well familiarize yourself now.

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

Enhancing Business Value through Customer Diversification Case Study: Reducing Risk and Increasing Value through Customer Diversification One of the biggest threats to business value is high customer concentration. Let’s explore a case study where diversifying the customer base significantly enhanced business value. The Challenge: A professional services firm relied heavily on a single client for over 60% of its revenue. This high customer concentration posed a significant risk to the business’s stability and attractiveness to potential buyers. The Solution: 1. Market Research: Conducted extensive market research to identify new target markets and potential clients. 2. Diversified Service Offerings: Expanded service offerings to appeal to a broader audience, addressing the needs of various industries. 3. Sales and Marketing Strategy: Developed and executed a robust sales and marketing strategy focused on client acquisition and retention. 4. Client Relationship Management: Implemented a client relationship management (CRM) system to better manage and nurture relationships with new and existing clients. The Results: - Customer Base Diversification: Reduced reliance on the largest client from 60% to 30% of total revenue within a year. - Revenue Growth: Achieved a 20% increase in overall revenue by acquiring new clients across diverse industries. - Business Value: The business became more attractive to potential buyers due to reduced risk and a more stable revenue stream. This case highlights how diversifying your customer base can mitigate risks and significantly increase your business's value. Proactively managing client concentration is crucial for long-term success and sustainability. Interested in learning more about strategies to diversify your customer base and enhance your business value? Let’s connect! #BusinessGrowth #CustomerDiversification #RiskManagement #BusinessValue #Entrepreneurship

Most buyers flee when they see a "risky" deal. I've learned how to make smart offers on them. Here's how to turn risk into reward: I was working with a seller who had just over $2M in earnings. They expected a strong multiple. But I found a major problem: $650K of those earnings came from one customer in a separate product line. This wasn't one business - it was two: • A solid $1.4M diversified operation • A risky $650K single-customer dependency Instead of applying one blanket multiple that penalizes the entire deal, I break risky acquisitions into distinct components and value each based on its actual risk profile. This is my "weighted average valuation technique," and it's turned dozens of "impossible" deals into profitable acquisitions. My 4-step process breaks down like this: Step 1: Isolate the material risk completely from normal business operations. The single customer dependency became its own valuation bucket. Step 2: Value each component separately using appropriate multiples. Main business earned 4-4.8x (market rate), while the risky piece got 1-2x (risk-adjusted). Step 3: Add them together for a fair total offer that accounts for both solid fundamentals and concentrated risk. The math becomes transparent for both parties. Step 4: Run the gut check by calculating your overall multiple. If both sides would accept this blended rate, you've created a logical deal structure. Here's how this approach solved another tricky situation: One of my deals involved 33% customer concentration - significant but not deal-breaking. We structured it as $2M at full multiple for the diversified portion, with the concentrated customer handled through a revenue share. The solution? 15% of that customer's revenue for 2 years, giving the seller upside while protecting my downside. The key insight here is always pegging earnouts to revenue, never profits. Revenue is clean and trackable, while profit-based earnouts create endless disputes about ad spend, management decisions, and accounting methods. This technique has turned dozens of "impossible" deals into profitable acquisitions. You're not walking away from good businesses - you're just pricing risk appropriately. --- Thanks for reading! Follow me, Walker Deibel, for more business insights like the above. PS. In case you didn't know, I send out a free, 2,500 word newsletter every single week to 70,000 acquisition entrepreneurs. Master acquisitions HERE: walkerdeibel.com - If you enjoyed this post: ♻️ Reshare for others who might find it useful ➕ Follow me, Walker Deibel for more 💭 Share your thoughts below 👇

When you’re buying a business using an SBA loan—especially with 70% to 85% leverage—understanding customer concentration isn’t just a nice-to-have. It’s critical. Too often, buyers focus on top-line revenue or EBITDA without pausing to ask: Who is generating that revenue? I was recently working with a client who was acquiring a high-end in-home healthcare business. On paper, the deal looked attractive. Strong recurring revenue. Premium pricing. Loyal client base. But once we peeled back a layer, we realized that one of the top revenue-generating clients was in their 90s—an elderly individual whose passing would immediately eliminate a substantial chunk of the business’s monthly income. That single client made up nearly 15% of revenue. This isn’t just a healthcare story—it applies across industries. Whether you’re acquiring a B2B service provider with a handful of large contracts or a DTC brand with a few whales driving the bulk of sales, customer concentration needs to be front and center in your diligence. When you’re buying with leverage, especially SBA leverage, a post-closing revenue dip—caused by the loss of a key customer—can put you in a tough spot. Diligence needs to go deeper than the P&L. You need to look at: ✔️The age and demographics of top clients The contractual stickiness (or lack thereof) ✔️The risk of churn or switching ✔️Whether any of the top accounts are friends/family of the seller ✔️And how diversified the revenue truly is If you’re going through this process and need help identifying customer concentration risk during diligence, I highly recommend connecting with Chris Barrett, CPA at Midwest CPA. His work goes beyond surface-level QofE—he gets into the weeds on customer quality, durability, and concentration. Buying a business isn’t just about buying earnings. It’s about buying who is driving those earnings. And when you’re using debt to make the purchase, you can’t afford to miss that.

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