One of our legacy customers accounts for forty percent of our total revenue, and I know buyers will heavily discount our valuation because of this concentration. How do we neutralize this risk before we go to market?

Question

Tyler Smith · Accepted Answer

Customer concentration is one of the most common reasons deals fall apart or multiples get slashed. Buyers view a single large account as a single point of failure. To neutralize this risk, you must prove that the relationship is institutionalized and not dependent on you personally. First, transition the daily management of this account to a key account manager on your Accountability Chart. Document this transition completely so the buyer can see that you have not been the primary contact for at least twelve months. Next, try to secure a long term, multi year contract with this customer that includes clear change of control provisions. If a contract is not possible, use your client data to show a long history of recurring transactions and stable margins. You can also frame the customer concentration as an opportunity by showing a prospective strategic buyer how they can cross sell their own products into this massive account. If the concentration cannot be mitigated, be prepared for buyers to structure the deal with an earnout or seller note tied to the retention of that specific customer, which keeps some risk on your table but preserves your overall valuation.