For searchers and independent sponsors, finding a great business to acquire is a constant balancing act. You want strong cash flow, a defensible market position, and a path to growth. But one red flag will send investors running immediately: high customer concentration.

At first glance, customer concentration may not seem like a deal-breaker. After all, a business that generates millions in revenue from just a handful of loyal customers might look stable. But to investors, that’s a major risk—one that can kill a deal. Here’s why:

A Single Point of Failure

When one or two customers make up a significant portion of revenue, the business is only as strong as those relationships. If one key customer leaves, revenue can take an immediate and dramatic hit. Customers always have alternatives. They can renegotiate pricing, demand better terms, or take their business elsewhere. Contracts may protect you for a little while, but it's unlikely they will last until the time comes for you to sell the business.

And more often than not, what appears to be a "longstanding business relationship" is really a personal tie between the owner and the customer. It’s not about better pricing or standout service—it’s that the owner has built a personal relationship with the customer over years of casual check-ins, favors, and shared history. That kind of connection doesn’t necessarily survive a change in ownership.

Limited Control Over Growth

Businesses with high customer concentration often struggle to scale. When a large portion of revenue depends on a few accounts, much of the company’s resources go toward maintaining those relationships instead of acquiring new customers. This creates a fragile ecosystem where growth is unpredictable and dependent on external factors, not the company’s internal efforts.

Tougher Exits

Even if you can get a deal done on the front end, customer concentration will follow you into your exit process. Future buyers—whether they’re private equity firms, strategics, or other sponsors—will scrutinize the customer base the same way your original investors did. Businesses with high concentration are harder to sell, require more explanation, and often demand deeper diligence. That slows down processes and can scare off otherwise interested buyers.

Yes, There Are Exceptions

Some industries are structurally concentrated. If you're selling auto parts to OEMs, government IT services to federal agencies, or highly engineered components into aerospace, having just a few customers may be the norm. In those cases, investors will still scrutinize the relationships, but they’ll also understand the broader market context. The key is knowing whether your deal is a true exception—or an unjustified risk.

What Seasoned Investors Say

I’ve asked many experienced investors what common threads they’ve seen in deals that went south. By far, the most frequent operational issue I hear cited is a large customer leaving shortly after the deal closes. This isn’t just some hypothetical fear—they’ve lived it.

Final Thoughts

Customer concentration isn’t just a box investors check during diligence—it’s a real risk that has sunk many deals. Ignoring this issue or brushing it off as “something we can fix later through growth” is a mistake. It needs to be front and center in your analysis from day one. Investors don’t shy away from concentrated businesses without reason—they’ve seen how quickly things can unravel. You don’t want to learn that lesson the hard way.

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Main Street Capital Network is a syndicate of 200+ SMB investors—individuals, family offices, and funds.

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