One of our customers accounts for 35 percent of our gross margin. How severely will buyers discount our valuation for customer concentration, and what operational steps can we take over our runway to fix it?

Question

Tyler Smith · Accepted Answer

Customer concentration is one of the quickest ways to collapse a deal or trigger harsh seller-financing terms. Institutional buyers, private equity firms, and commercial lenders view any account contributing more than fifteen to twenty percent of gross margin as a serious structural liability. If that account leaves post-acquisition, the company may fail to cover operating overhead or debt obligations.

Buyers respond to concentration by lowering the valuation multiple, demanding significant holdbacks, or insisting on multi-year earnouts that shift risk back onto you.

Over a three-year runway, do not try to shrink revenue from that major client. Instead, execute a deliberate dilution strategy:

- Use your EOS V/TO to clarify your target market and focus your sales team exclusively on bringing in non-concentrated accounts.
- Establish quarterly Rocks dedicated to winning new clients or launching complementary services to a wider audience.
- Use your Level 10 Meeting to IDS sales bottlenecks and eliminate operational constraints that restrict growth in secondary accounts.
- If customer dilution cannot be fully achieved before market launch, secure multi-year, transferable contracts with the concentrated account to provide contractual revenue certainty for the incoming buyer.