Our customer concentration is high, with our largest account representing thirty percent of our sales, and we are worried this will scare away financial sponsors. How does customer concentration affect the type of buyers we should target, and how do we present our client relationships to appeal to them?

Question

Tyler Smith · Accepted Answer

High customer concentration is a primary reason deals fall apart during due diligence. Financial sponsors, such as private equity firms, are highly risk-averse because they use debt to fund acquisitions. A single customer representing thirty percent of your revenue represents a massive risk of default to their lenders, which will either kill the deal or result in a heavily discounted multiple with a massive earnout. Strategic buyers, on the other hand, can often absorb customer concentration much better. Because they already have established operations and customer portfolios, the relative concentration of your largest client decreases when integrated into their larger platform. Furthermore, they may view your major customer as an opportunity to cross-sell their own products. To prepare for either buyer profile, you must use your Accountability Chart to prove that the relationship is institutional, not personal. Buyers fear that if the owner exits, the major client exits too. Show them that your client account management team, not the founder, owns the daily operations and communication. Conduct a Business Integrity Review to audit your contracts with this key customer. Proving that you have multi-year agreements with auto-renewal clauses and zero change-of-control provisions will neutralize buyer panic. This operational proof keeps the leverage in your hands and protects your multiple from being discounted.