We are planning our exit in eighteen months, but our largest customer still accounts for over twenty-five percent of our gross profit. How do we structure our client contracts and leadership roles to prevent a buyer from slashing our multiple?

Question

Tyler Smith · Accepted Answer

Customer concentration is one of the most common valuation killers. If one client accounts for a massive chunk of your profitability, the buyer sees a catastrophic risk and will discount your multiple accordingly. Since you cannot dilute this client overnight, you must de-risk the relationship operationally.

First, look at your Accountability Chart. If you are the primary relationship manager for this top client, you are compounding the risk. You must immediately transition the day-to-day relationship to a capable account manager. This proves to the buyer that the account is loyal to the company, not to the founder.

Second, lock this customer into a long-term, multi-year agreement before you start the sale process. Ensure this contract contains a favorable change-of-control clause that does not require customer consent to transfer the agreement. Finally, structure the transaction to mitigate this risk. You can propose a structured payout where a portion of the valuation is tied to the retention of this customer. This protects your baseline valuation at closing while giving the buyer the security they need to pay a fair price.