Customer Concentration Risk: How to Diversify Revenue Sources Prior to a Business Sale

When buyers analyze a business, they will often start by spending time reviewing revenue trends, then diving a layer deeper into the composition of your revenue. The goal of this exercise is to assess revenue stability and repeatability. One factor that can pose valuation headwinds, or even kill a deal outright, is customer concentration risk.

This post will define customer concentration, explain why it matters to buyers, and most importantly, offer suggestions regarding what you can do to reduce concentration in advance of an exit.

What Is Customer Concentration Risk?

Customer concentration risk arises when a large percentage of your revenue comes from a small number of clients. It’s typically flagged when any single customer contributes more than 10% of total annual revenue, and becomes a sizable challenge when any single customer contributes more than 20% of annual revenue. Total revenue across your top five or ten customers is also an important consideration, with concentration among top customers representing a risk for acquirers.

A high level of customer concentration poses a clear risk to business continuity from a buyer’s point of view. If a key customer churns after the transaction, the business could suffer a major financial blow, posing real threats to operations and business value.

Why Buyers Care About Concentration

Buyers desire confidence that the revenue stream they’re acquiring will remain stable post-sale. High customer concentration introduces uncertainty, and uncertainty lowers valuation.

Below are a few ways that concentration risk specifically impacts the buyer’s thinking:

• Revenue Predictability: When income is tied to a few customers, one customer loss can create major cash flow disruption.

• Customer Retention Risk: Buyers worry that customers may have loyalty to you personally and not the business. A change in ownership might prompt them to leave.

• Bargaining Power: A dominant client often holds leverage in pricing or contract terms, which could put post-sale profitability at risk.

• Deal Financing: Lenders and investors often flag high customer concentration as a risk that affects funding or deal structure.

Buyers often price this risk into the deal through lower multiples, large earnouts, or seller notes tied to customer retention.

When Should You Start Addressing Concentration?

Depending on the reason you’re experiencing customer concentration, the path to diluting revenue from top customers can be long. Ideally, you begin addressing customer concentration years before selling. While this isn’t a quick process, it becomes easier with deliberate planning. Diversification efforts compound over time and having a longer runway allows you to show tangible results.

Strategies to Reduce Customer Concentration Risk

Below are a handful of specific actions you can take to de-risk your customer base and position your business more attractively to acquirers.

1. Expand Your Customer Base

The most straightforward approach is also the most fundamental – attract more customers. This can involve refreshing your marketing strategy, investing in sales personnel, or targeting new audiences for your product or service.

Rather than focusing solely on big-ticket clients, look to acquire multiple smaller accounts. A broader base spreads risk and improves stability in the eyes of a buyer.

2. Diversify Revenue Sources

Adding new services, products, or verticals can naturally reduce dependence on any one client or sector. For example, a consulting firm that relies heavily on one industry might expand into adjacent markets to reduce exposure to the industry in which the firm has concentration.

This step can improve revenue stability but it also has the effect of making a business more resilient to economic cycles, which can enhance value at sale.

3. Standardize Onboarding

For many small businesses, onboarding complexity or lack of process can prevent the growth required to dilute customer concentration. If onboarding a new customer or delivering your service requires a number of manual steps, this may limit scalability.

Documenting and automating processes, where possible, can help lower the friction and cost of onboarding a new customer. Businesses that have seamless customer onboarding are generally well positioned from an operations perspective to address customer concentration.

4. Introduce Recurring Revenue Models

Shifting from project revenue to subscription models helps stabilize revenue and smooth out revenue forecasting. Not every business is a candidate for recurring revenue. Make sure to consider whether your product or service is consumed on a frequency that justifies subscription pricing.

5. Secure Long Term, Transferable Contracts

Buyers want to know that customers are likely to stay, especially during the transition period. One way to ease their concerns is by having long term contracts in place. Ideally, these contracts have clear terms and can be transferred during a sale.

It’s worth reviewing your existing client contracts to ensure they are assignable and don’t include termination clauses triggered by a change in ownership. This gives buyers greater confidence that the revenue will stick.

6. Expand With Existing Clients

If it is not immediately possible to acquire a large number of new customers, consider deepening relationships with your existing customers. An account review of customers and the services they consume often results in opportunities to pitch new services or products to existing customers.

Customer retention is usually cheaper than customer acquisition, thus expansion should similarly be a more cost effective path to diluting concentration than new customer acquisition.

What If You Can’t Reduce Concentration Prior to a Sale?

Sometimes, reducing customer concentration before a sale isn’t feasible. In that case, mitigating the risk of losing a key customer becomes the goal. Structure is also an important tool in this scenario.

• Demonstrate customer loyalty: long-term relationships, testimonials, or satisfaction surveys are a good way to show stability and loyalty

• Highlight contractual protections: renewal clauses, lack of change-of-control provisions, and the inability to terminate for convenience are important to consider

• Offer transition support: the seller’s continued involvement after the sale may help ensure client retention, or comfort the buyer

• Use retention as a tool: if a seller is confident a customer will remain with the business, an earnout or seller note tied to retention may go a long way with the acquirer

Take Steps Now to Unlock a Successful Sale Process

Reducing customer concentration is one of the most important things a business owner can do before an exit. Not only does this increase buyer confidence, it also strengthens your business for the long term.

By diversifying your customer base, you're building a company that’s more stable, scalable, and ultimately, more valuable. Whether you sell next year or five years from now, the goal is to increase the odds that a transaction will happen.

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