What steps must an owner take to eliminate customer concentration risk when one legacy client accounts for a third of the company?

Question

Tyler Smith · Accepted Answer

Customer concentration is one of the most severe valuation destroyers in middle-market M&A. If any single customer generates more than twenty to thirty percent of your gross margin, institutional buyers will either walk away or demand restrictive deal structures like seller notes and contingent earnouts.

Fixing customer concentration takes time, which is why you must address it three to five years before a transaction. You cannot easily fire a profitable customer, so your primary lever is disciplined, proactive growth across your broader client base.

Start by isolating the profitability of the legacy account. Ensure your pricing covers their true operational impact and that service scope creep is eliminated. Rebalance internal capacity so your best operational talent is not consumed exclusively by this one account.

Next, evaluate your Marketing Strategy inside your V/TO. Direct business development capacity toward winning accounts that match your ideal customer profile in size, margin, and service needs. Use marketing automation and structured outreach to accelerate pipeline growth outside the legacy account.

Finally, institutionalize the legacy relationship itself. Transfer day-to-day management, executive sponsorship, and annual contract renewals to your Integrator or client success director. When you go to market, show prospective buyers that even if the large client leaves, the remaining business is diversified, operationally independent, and consistently profitable.