Customer Concentration: How Buyers Price the Risk
- Cameron DuPree
- Aug 10
- 2 min read
Of all the issues that reduce what a buyer will pay for a lower-middle-market company, customer concentration is the most common and the most expensive. It is also, given enough lead time, one of the most fixable.
The thresholds that matter
As a rough guide to how buyers react: below ten percent from any single customer, concentration is a non-issue. Between ten and twenty percent, expect questions in management meetings. Between twenty and thirty percent, expect it to affect deal structure. Above thirty percent, expect it to affect price directly, and above fifty percent many buyers will simply decline.
These are not rules, they are patterns. A thirty percent customer on a ten-year contract with switching costs is a very different risk than a thirty percent customer who renews annually on price.
What buyers are actually worried about
The fear is simple: the buyer pays you for earnings that depend on a relationship that may not survive the ownership change. Every question they ask is a version of that concern. How long has the relationship existed? Is it contracted or at-will? Who at your company owns the relationship? Has the customer ever put the work out to bid? What would happen to margins if they left?
Notice that the last question is the real one. Concentration is dangerous not just because revenue could disappear, but because the fixed cost structure would remain.
How it shows up in the deal
Concentration rarely kills a deal outright. Instead it changes the shape of one. Buyers respond with earnouts tied to the customer's retention, escrow holdbacks released after the relationship survives a defined period, larger seller notes, or a lower multiple applied to the whole business. Any of those moves real money from your side of the table to theirs.
What to do about it
If you are twelve to thirty-six months from an exit, diversification is the answer, even at the cost of near-term margin. Winning three mid-sized customers is worth more at closing than the marginal profit from serving one large one.
If you are closer to market than that, documentation is the answer. Get the relationship contracted with real terms and a reasonable notice period. Transfer the relationship from you personally to a manager or team so it is institutional. Assemble the tenure history, the renewal record, and any evidence of switching costs, and present it proactively rather than waiting for diligence to surface it.
A concentration issue you raise and explain is a risk the buyer prices calmly. One they discover in diligence is a renegotiation.
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