Alternative views on customer concentration?

January 26, 2026

by a searcher from University of California, Berkeley - Haas School of Business in Los Angeles County, CA, USA

I know the guidance to be very wary with customer concentration exists for a reason, but am trying to determine if this is another potential path to finding valuable deals in places where others will pass on them. Do folks have any more nuanced approaches to assessing customer concentration beyond just having a set threshold, e.g., 15%? For example, some things/lenses I would think could lead to opportunities to mitigate concentration: - Length of customer relationship - Durability of revenues (consistency, stickiness) - Ability to keep seller tied to the business (equity roll, large seller note ideally forgivable, ...) - Year-to-year changes in revenue/customer that are normal for the industry - some industries naturally lend themselves to fluctuations in rev/customer where there may be concentration in a given year but it's the largest customer can change from year to year - others?

Reply by a lender
from University of Central Florida in St. Petersburg, FL, USA

Everyone will approach it differently. However, it doesn't always have to be a bad thing or a deal killer. The items mentioned above are all great things. If you're going SBA or conventional - you could mitigate the risk by structuring a performance-based seller note.

Reply by a searcher
from University of Pennsylvania in Philadelphia, PA, USA

There is a lot of nuance around customer concentration, but concentration poses a risk even if there are mitigants. That's why most searchers / investors are hesitant to acquire a business that has any meaningful customer concentration (above 15%). Imagine if one of your customers constitutes 25% of your revenues and decides to purchase from a different vendor. Most businesses don't have fully variable expenses, so your cash flow available for debt service will likely decline by more than 25%, and most levered buyouts couldn't survive that sort of hit. With that said, the first business I acquired had one large customer who accounted for ~30% of revenues. It was ultimately a leap of faith, but here was what helped me gain comfort: 1. This customer had been working with us for over 20 years and we were deeply embedded in their workstreams, including hosting a monthly coordination meeting with their entire administrative team. 2. We have no real competition because we are in such a niche space, and replacing us meant hiring people to do the work internally because their staff is stretched thin already. Furthermore, we constitute <1% of their expenses and internalizing our work doesn't have much upside with considerable short term pain. 3. We deliver a clear ROI on every dollar they spend with us - annually our ROI is always positive and currently one of our live projects with this customer could return ~4x our annual fee to them. In summary, the relationship was very sticky, switching costs are high with little upside, and we deliver and can communicate our ROI. Now on the other side of the acquisition, they are still one of our largest clients but we have cultivated other customer relationships to reduce the customer concentration. They're not questioning our charges, but I just pulled up our customer report and we are charging them less over time, basically passing our efficiency gains onto our customer. Glad to have that as evidence of an equitable working relationship in case they ever ask!

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