Customer Concentration
What counts as too much customer concentration when buying a business?
One customer is more than 50 percent of revenue and there is no long-term contract. Between 30 and 50 percent is the moderate version of the same disease.
Severity is tiered. Over 50 percent of revenue with no long-term contract is CRITICAL and you walk. Between 30 and 50 percent is MODERATE: diversify in year one and price the risk. Anything over 15 percent is worth a follow-up question.
What to ask for
Suspecting a flag is not the same as verifying one. These are the documents and signals that turn a hunch into a decision.
- Revenue by customer for three years, not just the trailing twelve.
- The top ten customers with contract status and expiry dates.
- Whether the top customer's share is rising or falling year over year.
- Any customer that arrived or left in the last twelve months, and why.
The question to ask the seller
“If your biggest customer left the day after I close, what happens? Is there a contract, or a handshake?”
Ask it in those words. A seller who answers straight is telling you something. A seller who dances is telling you more.
Concentration is a multiple problem before it is a revenue problem. Your lender discounts it, you discount it, and the buyer you eventually sell to discounts it again. A business with one dominant customer trades below a business with the same earnings spread across forty.
Ask for contracts with assignment language that survives a change of control. Where the concentration is real and the contracts are not, move the risk back to the seller with an earnout or a holdback tied to that customer staying.
Over 50 percent with no contract, walk. The business is a single relationship you do not own. At 30 to 50 percent, price the risk and build diversification into year one.
Travels with
Flags that show up together.
Screening one of these usually turns up the others. They share a cause more often than they share a coincidence.
Every deal you read gets safer.
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