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Customer Concentration and What It Does to Your Price

One big customer feels like a win until a buyer reads the numbers, and Stockton Business Brokers Prime sees it cut prices more often than almost any other issue.

Here is why.

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The short version

  1. Buyers get nervous when one to three customers bring in more than about fifteen to twenty percent of revenue.
  2. The discount can match the share, or the buyer may walk away.
  3. Owner dependent revenue is treated the same way.
  4. Fixing it takes years, not weeks.

The Rule of Thumb

When your top one to three customers bring in more than about fifteen to twenty percent of revenue, buyers see major risk. Many discount the price by roughly that share, and some walk away.

The same goes for owner dependent revenue, such as a personal client list that may not stay with a new owner.

Why Buyers Care

A buyer pays for revenue that will keep coming. If one account can leave, the earnings behind your price can vanish in a month. Lenders see the same risk and may refuse to fund the deal.

Buyers look back three to five years, so a single bad year of concentration still shows.

Check How the Account Is Built

Sometimes a concentrated account is really several independent clients under one umbrella. If that is true, document it. It looks less risky than it first appears.

Ways to Bridge the Risk

If you cannot fix it in time, a deal can include an earnout tied to keeping the key customer, or the seller can stay on as a partner for a transition. Both shift risk back to you, so weigh them carefully.

The better answer is to spread your customer base years before you sell.

Start Years Before You List

Buyers look back three to five years of revenue, so diversification takes time.

A business that depended on a single customer became unsellable the moment that customer was itself acquired. Add accounts steadily, and try to put key accounts under written agreements.

Document the Relationships

Show who handles each major account besides you. If your customers only know you, buyers worry they will leave when you do. Introduce a manager or lead to key accounts and keep notes on pricing, service and history.

Next Steps

Review your recast earnings and then request a valuation call to see how a buyer might treat your top accounts.

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