Customer Concentration
A risk metric measuring revenue dependency on top customers. High concentration (>20% from one customer) is a red flag in acquisition due diligence.
Customer concentration measures how dependent a business is on its largest customers, typically expressed as the percentage of revenue from the top 1, 5, or 10 customers.
Concentration Risk Levels
| Top Customer % | Risk Level |
|---|---|
| <10% | Low |
| 10-20% | Moderate |
| 20-30% | High |
| >30% | Very High |
Why Concentration Matters
Acquisition Risk
- Customer may leave post-acquisition
- Gives large customers negotiating leverage
- Business value depends on retaining relationships
Financing Impact
- SBA lenders scrutinize concentration heavily
- May require customer contracts or letters of intent
- Can limit debt availability
Due Diligence Questions
- What is revenue by customer for top 10?
- How long has each relationship existed?
- Are there contracts? What are terms?
- Why do they buy from you vs. competitors?
- Have you met the key contacts?
Mitigating Concentration Risk
- Negotiate customer retention agreements
- Meet key customers during due diligence
- Price in concentration risk (lower multiple)
- Structure earnouts tied to retention
- Build diversification into growth plan
Related Terms
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