The percentage tells you where to look
Two businesses can each derive 30% of revenue from one customer and present very different risks. A ten-year relationship with several contacts, recurring work, and few reductions or cancellations is not the same as a one-year project managed entirely by the owner. The percentage identifies the exposure. The facts determine how serious it is.
Baker Tilly identifies a customer above 10% of revenue or contribution margin as a possible risk to buyer returns. For this analysis, contribution margin is the revenue left after costs that rise and fall with the work, such as hourly labor, subcontractors, materials, freight, or sales commissions. The 10% figure is a useful point to begin reviewing the relationship, not a rule that automatically reduces value. Looking at profit as well as revenue matters because a large low-margin customer may create less earnings exposure than a smaller high-margin customer.
Axial’s 2025 Dead Deal Report shows that concentration can become a real transaction issue. It reviewed 75 transactions that had signed letters of intent, or LOIs, but did not close. An LOI is a preliminary document that outlines the proposed deal terms before the buyer completes its full review. In the sample, 25.3% of the failed deals were attributed primarily to issues found outside the formal quality of earnings review, where accountants test whether reported profit is recurring and supported by the records. Axial specifically included customer concentration and contract concerns in that category.
Customer concentration is one example of a diligence issue that can change a transaction after the LOI is signed. For a broader look at how earnings, working capital, contracts, and financing affect a deal at that stage, read Why Small Business Deals Fall Apart After the LOI.
The International Business Brokers Association has also identified customer concentration as a factor that can affect valuation, deal structure, and how easy a business is to sell. The point is not that every concentrated business receives the same discount. It is that the owner needs enough evidence for a buyer to evaluate the relationship instead of assuming the worst.
What the research supports
A customer above 10% of revenue or contribution margin deserves a closer review. That review should focus on the customer’s profitability, history, contract terms, relationship depth, and the practical difficulty of replacing the work.
What the research does not support
There is no universal concentration cutoff and no automatic multiple discount. Two businesses with the same revenue concentration can present very different risks depending on the earnings exposure and strength of the relationship.
Sources: Baker Tilly, Five Key Risks to Consider When Profiling a Closely Held Business; Baker Tilly, Ten Considerations in a Quality of Earnings Study; Axial, Dead Deal Report: Unpacking 2025’s Broken LOIs; International Business Brokers Association, Main Street News, June 2016.
Buyers do not price the percentage in isolation
Customer concentration does not translate into a fixed, universally accepted multiple adjustment. A rule such as “25% concentration automatically moves a business from 5.0x EBITDA to 4.5x” would ignore the facts of the customer relationship. Buyers focus on the downside: how much profit could disappear, what makes the customer likely to stay, whether the relationship depends on the seller, and how quickly the business could replace the lost earnings. The table below is a practical decision framework, not a pricing schedule.
| Risk level | What the buyer sees | Likely effect on value | Possible deal response | Best owner action |
|---|---|---|---|---|
| Lower concern | Long tenure, recurring or contracted work, multiple customer contacts, strong payment history, concentration declining, and little dependence on the owner. | Usually a diligence topic rather than a reason by itself to reduce value. | The buyer may be comfortable with the usual purchase-price payment terms and may not require part of the price to depend on customer retention. | Keep the records clean, renew where sensible, and continue growing the rest of the customer base. |
| Manageable | A meaningful customer relationship with a good history, but short termination rights, limited contacts, uneven volume, or incomplete customer-level reporting. | May narrow the buyer pool or push value toward the lower end of the range the business might otherwise receive. | The buyer may request more records and, at the appropriate stage with the seller’s approval, ask to speak with the customer. It may also seek limited protection if revenue falls soon after closing. | Add relationship depth, improve reporting, clarify renewal terms, and show a credible list of active sales opportunities outside the customer. |
| Elevated | A large share of earnings depends on one customer, the relationship is owner-led, the work is project-based or easy to move, or renewal is uncertain. | The buyer may reduce value, delay part of the payment, or make part of the price depend on the customer staying. | A longer seller transition, payment over time, or an industry buyer that can better absorb the exposure may make the deal more workable. | Reduce the dependency before a sale or prepare a detailed retention and downside plan. |
| Critical | The customer has signaled a reduction or exit, a major contract is expiring without renewal, there is an unresolved dispute, or the loss would materially impair the business. | The buyer may pause, reduce the price materially, or walk away. | The owner may need to wait, resolve the issue, or make part of the payment depend directly on the customer staying. | Do not market the business on earnings that assume the customer will continue unchanged if the evidence says otherwise. |
Risk rises when the exposure is both large and difficult to verify. Clean financial reporting by customer, clear contract and pricing terms, and relationships that extend beyond the owner do not eliminate concentration, but they reduce the uncertainty a buyer has to account for.
Measure the earnings at risk, not just the revenue at risk
Adjusted EBITDA is a common measure of normalized operating profit used in a business sale. To estimate the effect of losing a customer, do not subtract the customer’s full revenue from EBITDA. First calculate how much of that revenue remains after the direct costs of serving the customer. Then subtract any additional costs the business could realistically eliminate within 12 months. The result is an estimate of the first-year earnings loss.
Customer economics
Replacement burden
Worked example: a $5 million business-to-business service company
Assume a business-to-business service company generates $5 million of annual revenue and $1 million of adjusted EBITDA. Its largest customer generates 30% of revenue, or $1.5 million. The direct costs tied to serving that customer leave a 40% contribution margin. The company also has $100,000 of customer-specific annual costs that it could stop paying within 12 months. The steps below show the estimated earnings exposure.
The company earns $1.5 million a year from this one customer.
After labor, materials, subcontractors, freight, commissions, and other costs tied directly to this customer, $600,000 remains before shared company costs. This is the customer’s contribution, not EBITDA.
These are costs used only for this customer, such as a dedicated equipment lease or customer-specific software. Do not include rent, management salaries, or other costs the business would keep paying.
The business loses the $600,000 contribution but avoids $100,000 of customer-specific costs, leaving an estimated $500,000 reduction in EBITDA.
Current adjusted EBITDA of $1 million falls to an estimated $500,000.
At a 35% contribution margin on new work, about $1.43 million of replacement revenue would be needed to rebuild $500,000 of EBITDA.
The customer represents 30% of revenue but approximately 50% of current adjusted EBITDA in this simplified example. That difference is why revenue concentration alone does not tell the full story. If new work is expected to produce a 35% contribution margin, the company would need approximately $1.43 million of new annual revenue to replace the estimated $500,000 earnings loss.
The next questions are practical: How likely is the customer to leave? Would spending decline gradually or stop at once? Which costs could actually be reduced, and how quickly? Does the company have enough active sales opportunities to replace the work? The better the owner can answer those questions with records and a realistic plan, the easier the risk is to evaluate.
Single-Customer Concentration Stress Test
Use this tool for one customer at a time, starting with the largest. It estimates how much operating profit depends on that customer and how much new revenue may be needed if the customer leaves. If several customers each represent a large share of revenue, run the test separately for each one and then consider what would happen if more than one reduced spending at the same time.
Illustrative only. Run the calculator for one customer at a time. It does not predict whether a customer will leave or determine business value. Actual results depend on the customer’s behavior, the true direct costs of serving it, which additional expenses would genuinely stop, how quickly replacement work can be won, and whether serving new customers would require additional staff or overhead.
Three ways owners can strengthen the story before a sale
Grow around the customer
Do not intentionally shrink a good customer relationship just to improve a ratio. Grow the rest of the business so one customer represents a smaller share over time.
- Track the top one, five, and ten customers each month.
- Set new-customer sales goals by industry, service line, and customer size.
- Build a list of active sales opportunities outside the concentrated customer.
- Do not replace profitable revenue with poor-margin work simply to appear diversified.
Move the relationship beyond the owner
Concentration is more concerning when the customer relationship exists mainly because of the seller.
- Assign a capable employee to lead the relationship.
- Develop several contacts at the customer.
- Document service history, pricing, commitments, and open issues in the company’s customer records or CRM system.
- Bring other employees into regular reviews and planning meetings.
Strengthen and document durability
Documentation cannot eliminate the risk, but it can make the relationship easier for a buyer to understand and trust.
- Renew or extend agreements where commercially sensible.
- Review whether the customer can end the contract, whether the contract can be transferred, and whether a sale gives the customer a right to terminate.
- Document tenure, renewal history, payment performance, and the time, cost, or disruption the customer would face by changing providers.
- Explain why the customer buys, what would cause it to leave, and how the company would respond.
If the business must go to market before the risk is reduced, the payment terms can share some of the exposure. An earnout means part of the price is paid only if agreed results are achieved after closing. A seller note means the buyer pays part of the price over time. A holdback means a portion of the price is temporarily withheld until an agreed condition is met. A longer seller transition can help move the customer relationship to the new owner. These tools can make a transaction workable, but they do not improve the underlying business.
Seven items to prepare before buyers ask
Preparation should make the exposure measurable, not bury the buyer in documents. These seven items address questions that commonly surface late in diligence.
Research and transaction sources
Axial
Supports the failed-LOI data and the inclusion of customer concentration and contract issues among findings outside the formal earnings review.
Dead Deal Report: Unpacking 2025’s Broken LOIsBaker Tilly
Supports the use of 10% as a point to begin reviewing concentration and the importance of customer stability, relationship depth, and switching costs.
Five Key Risks to Consider When Profiling a Closely Held BusinessBaker Tilly
Supports evaluating concentration on gross profit or contribution margin rather than revenue alone.
Ten Considerations in a Quality of Earnings StudyInternational Business Brokers Association
Supports the practical view that customer concentration can affect valuation, deal structure, and how easy a small business is to sell.
Main Street News, June 2016This article provides general information about private-company transactions. It is not legal, tax, accounting, valuation, or lending advice. The effect of customer concentration depends on the facts of the business and the transaction.
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