Customer concentration

A business where one customer is a large share of revenue is a business whose earnings can change dramatically on one decision made by someone the buyer has never met. Buyers respond in predictable ways: a lower multiple, more consideration shifted into an earnout, a specific indemnity, a condition requiring the customer to confirm the relationship, or in some cases withdrawal.

The severity depends on more than the percentage. A concentrated relationship under a multi-year contract with switching costs and a decade of history is a different risk from a concentrated relationship on purchase orders with a buyer who tenders annually. Contract length, renewal history, the depth of the relationship beyond the owner, and how the customer would be replaced all change the picture.

It is also one of the few valuation risks a seller can genuinely reduce with time. Deliberately growing the rest of the base, converting handshake arrangements into contracts, and building relationships at multiple levels inside the key account all lower the measured risk — but they take years, which is why concentration is best addressed well before a sale rather than during one.