One of our long-term customers accounts for twenty-five percent of our revenue, and we cannot diversify before our target sale date. What operational steps can we take to protect our valuation against this customer concentration risk?

Question

Tyler Smith · Accepted Answer

Customer concentration is a common deal-killer or valuation-depressor. If you do not have enough time to organically dilute this client's share of your revenue before a sale, you must de-risk the relationship operationally so a buyer feels secure.

First, lock down the relationship contractually. Work to transition this customer to a long-term contract that extends at least two to three years beyond your target exit date. Ensure the contract has a clear change-of-control clause that allows the agreement to transfer to a new buyer without renegotiation.

Second, remove yourself as the primary point of contact. If you are the owner and also the key relationship manager for this customer, the risk is doubled. Use your Accountability Chart to transfer the account management to a capable team member. This transition must be complete and visible. The customer should be comfortable dealing entirely with your team for all daily needs, strategic reviews, and contract renewals.

Third, document the specific standard operating procedures used to service this client. Show the buyer that any qualified employee can step in and deliver the same level of service. By proving that the customer is loyal to your company's processes and brand rather than to you personally, you greatly reduce the buyer's anxiety and protect your transaction value.