Customer Concentration - A Framework for Understanding Exit Valuation Risk

The call came on a Tuesday afternoon. A manufacturing business owner, three years into exit planning, had just received feedback from a potential buyer. His company generated approximately $8 million in revenue with healthy margins, a solid management team, and proprietary processes. The offer came in significantly below his expectations. The buyer’s feedback cited multiple factors, but one dominated the conversation: roughly one-third of his revenue came from a single automotive supplier. That concentration, combined with annual contract renewals and relationships primarily managed by the owner, triggered a valuation discount that surprised him, though in retrospect, the warning signs had been visible for years. (Note: This is a composite scenario based on patterns we’ve observed across approximately 40 client engagements over the past seven years, not a single specific transaction.)

Executive Summary

Customer concentration represents one of the most common, and often addressable, concerns buyers raise during middle-market transactions. Through our advisory work with business owners preparing for exit, we’ve observed recurring patterns in how buyers evaluate concentration risk. While every transaction is different and we want to be transparent that these observations reflect our firm’s experience rather than statistically validated research across large transaction databases, the patterns suggest general ranges worth understanding.

In our experience working with US middle-market transactions from 2018-2024, concentration approaching 15-20% of revenue from a single customer often begins to appear prominently in buyer due diligence conversations. When concentration reaches higher levels, frequently in the 25-35% range based on our observations, it can become a factor in pricing discussions, earn-out structures, or other risk-mitigation mechanisms. At very high concentration levels (above 50%), we have encountered situations where traditional sale transaction structures become challenging to execute.

We want to be clear about what these ranges represent: they reflect practitioner observations from our work and conversations with buyers, not empirically validated thresholds. The actual impact on any specific transaction depends heavily on factors including industry norms, contract protection, customer financial health, buyer type, and relationship transferability. Professional services firms, for example, routinely operate with higher concentration levels than these ranges suggest, and sophisticated buyers in those industries adjust their expectations accordingly.

Understanding these dynamics provides actionable intelligence for exit planning. Business owners with two to seven years before their planned exit have meaningful runway to address concentration through deliberate customer diversification, strategic revenue development, and relationship documentation that demonstrates transferability, provided the economics of doing so justify the investment. This article examines the factors behind concentration-related pricing adjustments, provides a framework for assessing your current risk, and outlines strategies for managing concentration in ways that may preserve value at exit.

Introduction

Customer concentration exists on a spectrum, and where your business falls on that spectrum materially affects how buyers perceive risk. Yet many owners underestimate concentration’s impact until they’re deep in due diligence, when the power to address it has largely evaporated.

The challenge is that concentration often correlates with success. Your largest customers are typically your best customers: they found value in your offering and expanded the relationship. The revenue feels stable, the margins are often strong, and the operational efficiency of serving fewer, larger accounts creates real economic benefits. Many owners view their top customer relationships as assets rather than liabilities, and in many ways, they’re right.

Most buyers see it differently. For an acquirer, customer concentration represents asymmetric risk: if that key relationship deteriorates post-close, they bear the full impact of revenue loss while having paid a price based on historical performance. This risk asymmetry influences pricing and deal structure, though the specific impact varies significantly by buyer sophistication, industry experience, and transaction context.

The concentration ranges we’ll discuss provide a framework for understanding how concentration may affect exit options. These aren’t universal rules: they reflect patterns we’ve observed across our advisory work and conversations with active acquirers in US middle-market transactions. In our experience, concentration begins to feature in buyer conversations when it approaches 15-20% of revenue, can affect pricing discussions as it moves into the 25-35% range, and may reshape transaction structure when it exceeds 50%. But these ranges shift meaningfully based on industry, contract protection, and buyer type, sometimes dramatically.

What makes customer concentration particularly relevant for exit planning is its relative predictability compared to other value factors. While profitability improvements require operational transformation and market share gains depend on competitive dynamics, concentration management follows more established approaches, though the timeline, cost, and success probability of implementation deserve honest analysis before committing resources.

The Factors Behind Concentration-Related Pricing Adjustments

Why Buyers Evaluate Concentration Carefully

To understand concentration’s potential impact on valuation, you need to understand buyer psychology and deal economics. When a buyer acquires your business, they’re purchasing a stream of future cash flows. Their valuation reflects assumptions about revenue stability, growth potential, and risk factors that could impair those cash flows.

Customer concentration introduces a specific, identifiable risk: the potential loss of a significant revenue stream that may be tied to relationships, institutional knowledge, or circumstances that don’t fully transfer post-acquisition. Buyers evaluate this risk across several dimensions:

Relationship Dependency: How much of the customer relationship depends on you personally versus your organization? If your largest customer’s primary contact is the owner, buyers reasonably question whether that relationship survives a transition. Strong indicators of low dependency include multiple organizational contacts, formal contracts with standardized processes, and documented relationship history. Weak indicators include relationships primarily maintained by departing owners, informal agreements, and customized service dependent on specific individuals’ expertise.

Contract Structure: Are revenues protected by multi-year contracts with meaningful terms, or do they depend on purchase orders, handshake agreements, or annual renewals? Multi-year contracts with two or more years remaining, volume commitments, and price escalation clauses typically reduce buyer concern more than annual contracts, which in turn provide more protection than at-will relationships. The specific value of contract protection varies by buyer, but it consistently appears in due diligence discussions.

Customer Concentration on Their Side: If your largest customer also depends heavily on you, the relationship may be more stable than raw percentages suggest. A customer for whom you represent a significant portion of a critical input has meaningful switching costs that buyers can evaluate.

Industry Dynamics: Concentration in industries with long sales cycles and relationship-based purchasing (professional services, specialized manufacturing) differs substantially from concentration in transactional businesses where customers can more easily redirect spend. This industry variation is significant enough that we’ll address it separately.

When Concentration Enters Due Diligence Conversations

In our experience advising on US middle-market transactions from 2018-2024, we’ve observed that concentration approaching 15-20% of revenue from a single customer often begins to appear more prominently in buyer due diligence conversations. At this level, buyers don’t necessarily apply explicit discounts, but they do begin additional documentation requirements and risk assessment:

• Requests for customer-specific revenue history (typically two to five years, depending on contract cycles and buyer preferences)
• Analysis of contract terms, renewal patterns, and pricing trends
• Interviews or references to assess relationship depth and transferability
• Evaluation of your organization’s touchpoints with the customer beyond ownership

This range also tends to trigger internal conversations on the buy-side about potential mitigation strategies. Buyers may begin considering structures with concentration-specific protections: representations about customer relationships, indemnification for customer losses within defined periods, or contingent pricing based on retention.

We want to emphasize that the 15-20% range reflects our practitioner observations, not a validated industry benchmark. Some buyers focus on concentration at lower levels; others don’t raise concerns until concentration is significantly higher. For sellers, concentration approaching these levels is an early indicator worth monitoring. If you have customers at this level and exit is on your horizon, proactive attention now can prevent larger challenges later.

When Concentration May Affect Pricing and Structure

We have observed that when concentration reaches higher levels, frequently in the 25-35% range in our experience, it can move from a due diligence topic to a factor in pricing and deal structure conversations. But we cannot provide a precise discount percentage that applies universally, and we want to be direct about the uncertainty here.

We’ve seen transactions where significant concentration resulted in modest adjustments due to strong contractual protection and buyer confidence. We’ve also seen transactions where similar concentration levels triggered more substantial adjustments when contracts were weak and relationships appeared owner-dependent. The range of outcomes is wide because the underlying risk varies widely.

What we can say with more confidence is that buyers evaluating concentrated revenue streams often begin discussing structural protections:

Earn-Out Components: A portion of purchase price becomes contingent on customer retention, typically structured as payments over 12-36 months tied to maintaining revenue from concentrated customers.

Escrow Holdbacks: Additional proceeds held in escrow beyond standard indemnification reserves, released upon demonstrated customer retention.

Seller Transition Requirements: Extended transition periods specifically focused on customer relationship transfer, often with explicit requirements for introduction meetings, relationship documentation, and seller availability.

These structures effectively shift risk back to sellers, which may be acceptable if you’re confident in relationship stability, a point we’ll return to when discussing alternatives.

When High Concentration May Reshape Transaction Structure

We have encountered situations where customer concentration exceeding 50% required alternative transaction structures or, in some cases, limited the pool of interested buyers significantly. At very high concentration levels, some buyers view the acquisition as purchasing a customer relationship with supporting infrastructure rather than a diversified business with transferable value.

Transactions at high concentration levels sometimes take alternative forms:

Majority Earn-Out Structures: Purchase price becomes predominantly contingent, with a smaller portion paid at close and the balance tied to multi-year retention and revenue performance.

Strategic Partnerships: Rather than acquisition, buyers may propose joint ventures, licensing arrangements, or preferred vendor relationships that capture value without assuming concentration risk.

Customer-Contingent Pricing: Explicit pricing formulas tied to customer revenue, converting the transaction into a customer-by-customer purchase.

Customer Involvement in Transaction: In some cases, buyers request the concentrated customer’s explicit participation (new contracts, extended terms, or endorsement of the transition) as a closing condition.

For owners facing very high concentration, the implication is worth considering carefully: traditional sale transactions may require diversification or alternative approaches, though this isn’t universal and depends heavily on specific circumstances including industry norms and buyer type.

Critical Caveat: Industry Variation Matters Significantly

The concentration ranges described above apply most directly to manufacturing, distribution, and transactional service businesses. They require significant adjustment for other industries:

Professional Services: Concentration is endemic in law firms, consulting practices, and advisory businesses. A top client representing 30-40% of revenue is common and often expected by buyers in these sectors. Sophisticated buyers of professional services firms adjust their concentration expectations upward, though they remain concerned about relationship transferability.

Government Contracting: Single-contract concentration can routinely exceed 50% with long-term stability due to government procurement rules and multi-year contract structures. Buyers experienced in this sector evaluate concentration differently than the general framework suggests.

SaaS and Subscription Businesses: Customer concentration has different implications than transactional revenue because churn rates are more predictable and switching costs are often higher. Concentration in a SaaS business with 95% net revenue retention is evaluated differently than concentration in a project-based business.

Specialized Manufacturing with Sole-Source Relationships: When your customer has limited alternatives and qualification requirements create switching costs, concentration may be more acceptable to buyers who understand the industry dynamics.

Before assuming any general framework applies to your business, assess concentration norms in your specific industry. Your broker, M&A advisor, or industry peers can provide valuable context that may differ substantially from general observations.

Critical Caveat: Buyer Type Matters Significantly

The concentration ranges also vary meaningfully by buyer type:

Financial Buyers (Private Equity): In our experience, financial buyers tend to be most sensitive to concentration risk. PE buyers are purchasing cash flows and generally want diversified, predictable revenue streams.

Strategic Buyers Within Your Industry: May accept higher concentration if they have existing relationships with your customers, can cross-sell their offerings, or view your customer relationships as strategically valuable. A strategic buyer might pay full price for a business a financial buyer would discount significantly.

Consolidators (Add-On Acquisitions): When acquiring to add to an existing platform, concentration in the add-on may matter less because the combined entity will have diversified revenue. Your concentration gets absorbed into their broader customer base.

Vertical Integrators: May view concentration entirely differently depending on whether your concentrated customer is a competitor, potential customer, or complementary business.

As you approach exit, clarity on likely buyer type should inform your concentration strategy and expectations.

Assessing Your Concentration Risk

The Concentration Analysis Framework

Understanding your concentration exposure requires analysis beyond simple revenue percentages. We recommend examining concentration across multiple dimensions:

This multi-dimensional view reveals concentration risks that simple revenue analysis might miss. A business with no single customer above 15% might still face significant concentration if the top five customers are all in the same declining industry and all relationship-managed by the departing owner.

Calculating Your Concentration Metrics

For a quantitative baseline, calculate your concentration across these metrics:

Customer Concentration Ratio (CCR): Sum of revenue percentages for customers exceeding 10% of total revenue. A CCR above 30% warrants attention; above 50% warrants careful analysis of mitigation strategies and their economics.

Top Customer Dependency (TCD): Revenue from largest customer divided by revenue from customers 2-10. A TCD above 1.0 indicates significant dependence on a single relationship.

Concentration Trend: Compare current concentration metrics to prior years. Improving trends (decreasing concentration) can partially offset current levels in buyer perception, demonstrating management awareness and action.

Contract Protection Score: For your top five customers, calculate the weighted average remaining contract term. Customers with multi-year contracts and two or more years remaining provide more protection than annual renewals.

Strategies for Managing Concentration Pre-Exit

Before implementing any concentration management strategy, we strongly recommend honest economic analysis. Concentration management involves real costs and tradeoffs: the goal is to confirm the expected benefits exceed the investment required, accounting for execution risk.

Understanding the Full Economics of Diversification

Diversification is often discussed as if it were a straightforward solution, but the economics are more complex than they may appear. Based on our experience, meaningful diversification efforts in middle-market businesses typically require substantial investment:

Direct Costs (often acknowledged):

• Sales team hiring and training: $75,000-$150,000 per new sales representative
• Marketing investment for new customer segments: $50,000-$200,000 annually
• Business development travel and relationship building: $25,000-$75,000 annually

Indirect Costs (often underestimated):

• Owner and executive time: 200-500 hours over 18-24 months, which at opportunity cost rates of $300-$500/hour represents $60,000-$250,000 in implicit cost
• Focus diverted from profitable existing customers: difficult to quantify but potentially significant
• Risk of failed diversification: in our experience, 30-50% of diversification initiatives don’t achieve their revenue targets

Total Realistic Investment: Including direct costs, executive time, and probability-weighted risk of failure, meaningful diversification typically requires $300,000-$800,000 in total investment over 18-36 months.

This doesn’t mean diversification isn’t worthwhile: it means the decision should be based on realistic cost-benefit analysis, not optimistic assumptions.

When Concentration Management Makes Economic Sense

Concentration management is most likely to create value when:

Your exit timeline allows implementation: New customer acquisition typically requires 12-24 months before generating meaningful revenue, and enterprise sales cycles can extend to 24-36 months when qualification requirements are complex. If your exit is less than 18 months away, focus on contractual protections and relationship documentation rather than diversification.

The economics clearly favor diversification: This requires modeling the specific numbers for your situation. Consider this framework:

Example calculation structure (you must input your own numbers):

• Current EBITDA: $2,000,000
• Expected valuation multiple: 5x
• Current enterprise value: $10,000,000
• Estimated concentration-related discount (highly variable): 10-20%
• Potential value impact: $1,000,000-$2,000,000

Diversification investment required:

• Direct costs over 24 months: $200,000-$400,000
• Indirect costs (executive time, opportunity cost): $100,000-$200,000
• Risk adjustment (40% probability of underperformance): $120,000-$240,000 expected loss
• Total probability-weighted cost: $420,000-$840,000

If the expected valuation benefit exceeds the probability-weighted cost with meaningful margin, diversification may make economic sense. If the numbers are close, accepting the discount may be more rational.

Diversification doesn’t destroy profitability: Your largest customers often have your best margins and lowest acquisition costs. Diversifying toward less profitable customers might improve concentration ratios while reducing absolute value. Model the EBITDA impact before committing resources.

Your market allows diversification: Some businesses operate in niche markets with limited addressable customers. If diversification isn’t realistically achievable given your market structure, focus on other mitigation strategies.

Failure Modes in Diversification Strategy

Before pursuing diversification, understand the ways it can fail:

Failure Mode 1: Acquisition efforts don’t generate meaningful customers

• Trigger conditions: Weak market demand, competitive pressure, inadequate sales execution, longer-than-expected sales cycles
• Probability: Based on our observations, 30-50% of diversification initiatives don’t achieve their revenue targets
• Consequences: Investment of time and money without reducing concentration, potentially delayed exit
• Mitigation: Pilot approach with milestone-based investment, clear go/no-go decision points, timeline limits

Failure Mode 2: Diversification damages relationships with profitable existing customers

• Trigger conditions: Resource reallocation reduces service quality, key customers perceive divided attention, sales team bandwidth stretched too thin
• Probability: 15-25% risk if not carefully managed
• Consequences: Lost profitable revenue while gaining less profitable customers; net negative outcome
• Mitigation: Careful resource allocation, maintaining service levels, transparent internal communication about priorities

Failure Mode 3: New customers have significantly worse economics

• Trigger conditions: New customers demand pricing concessions typical for new vendors, require higher service levels, have lower lifetime value
• Probability: Common (new vendor relationships typically involve margin pressure)
• Consequences: Improved concentration ratio but reduced EBITDA and potentially reduced overall valuation
• Mitigation: Target customers with comparable or better margin potential; model EBITDA impact before pursuing

Deliberate Diversification (When Economics Support It)

When the economic analysis supports diversification, new customer acquisition that dilutes concentration is the most direct mitigation approach:

Target Account Identification: Identify prospective customers whose revenue potential can meaningfully shift concentration ratios. Acquiring ten small customers rarely moves the needle: you need prospects capable of becoming top-ten accounts. But be realistic: large prospect identification is difficult, most available large customers already have supplier relationships, and large customers often have longer, more complex sales cycles that can extend to 18-36 months.

Sales Investment Reallocation: Consider whether sales resources currently supporting existing large accounts could be partially redirected toward diversification. Large accounts often absorb disproportionate sales attention beyond their actual needs. Important caveat: This reallocation should be approached very carefully. Damage to profitable relationships with existing customers can exceed any diversification benefits. In relationship-sensitive businesses, we recommend maintaining full service levels with existing customers and adding capacity for diversification rather than reallocating from profitable accounts.

Geographic Expansion: New markets often provide paths to meaningful new customers, though geographic expansion typically requires 18-24 months before generating significant revenue and involves additional complexity and cost.

Adjacent Offerings: Products or services that open new customer categories can accelerate diversification, though product development timelines should be factored into your exit planning.

Realistic Timeline Expectations: Customer acquisition in most B2B businesses requires 6-18 months from prospect identification to revenue generation. Enterprise sales cycles can extend to 24-36 months, particularly when qualification requirements exist. Plan accordingly and build these timelines into your exit planning.

Revenue Acceleration with Existing Mid-Tier Customers

Often overlooked: growing your fourth through tenth largest customers can improve concentration ratios without acquiring new accounts. These are proven customers who already value your offering: the sales cycle is shorter and success probability higher than new acquisition.

This strategy makes sense when:

• Mid-tier customers have genuine expansion potential you can realistically capture
• Expansion doesn’t cannibalize growth with larger customers
• The expansion economics are comparable to or better than alternative growth strategies

Analyze your mid-tier accounts for expansion potential before committing resources to new customer acquisition. If your largest customer has better margins and growth potential, concentrating resources there may create more value than diversification even if it worsens your concentration ratio. The goal is enterprise value, not concentration ratios for their own sake.

Contractual Protection Enhancement

Even without changing actual concentration, you can reduce buyer-perceived risk through stronger contractual relationships with key customers:

Extended Terms: Pursue multi-year agreements with your largest customers. A three-year contract with two years remaining typically provides more comfort to buyers than annual renewals.

Pricing Protections: Contracts with agreed pricing mechanisms, escalation clauses, or volume commitments demonstrate relationship stability.

Termination Provisions: Notice requirements, transition assistance obligations, and termination fees all provide protection that buyers can evaluate.

Exclusivity or Preferred Supplier Status: Formal designation as an exclusive or preferred supplier signals relationship depth beyond transaction history.

Important consideration: Strengthening contracts often requires negotiation with customers who may seek concessions in return. Assess whether the value preservation at exit exceeds any pricing or term concessions you provide. In some cases, customers will agree to extended terms without material concessions; in others, the cost of obtaining contractual protection may exceed its value.

Relationship Documentation and Transition Planning

Concentration risk is partly about revenue percentage and partly about relationship transferability. Demonstrating that key relationships are institutional rather than personal can reduce buyer concern:

Multi-Level Relationships: Make sure your organization has relationships at multiple levels within concentrated customers: not just executive-to-executive, but operational, technical, and administrative contacts. Important caveat: This strategy works best when customer relationships are fundamentally partnership-based rather than dependent on specific individuals. In adversarial or price-sensitive customer relationships, introducing additional contacts should be positioned as service improvement rather than relationship diversification, and may not be appropriate in all cases.

Documented History: Create detailed relationship documentation including decision-maker maps, communication history, preference notes, and issue resolution examples.

Transition Rehearsal: Consider introducing key team members to your largest customers before any transaction, demonstrating that the relationship extends beyond you personally.

Earn-Out as a Seller-Proposed Alternative

This article has discussed earn-outs primarily as mechanisms buyers impose. But there’s an alternative worth considering: what if you propose an earn-out structure?

If you’re confident in customer retention, offering 20-30% contingent pricing over 24 months can accelerate exit, avoid the cost of diversification efforts, and let you demonstrate relationship stability through actual performance. This trades certainty of proceeds for transaction speed and simplicity.

This approach makes sense when:

• You have high confidence in customer retention based on contract protection, relationship depth, and customer financial health
• Your exit timeline is compressed and diversification isn’t feasible
• Diversification costs exceed the economic benefit based on realistic analysis
• You’re willing and able to remain engaged during the earn-out period

Model this tradeoff against the cost and timeline of diversification before assuming diversification is the optimal path.

The “Accept the Discount” Alternative

We should be direct: not all concentration requires management. In some cases, accepting the valuation adjustment is economically rational.

Consider accepting concentration-related adjustments when:

• The likely adjustment is smaller than the probability-weighted investment required to address it
• Concentration involves your most profitable customers with strong retention indicators
• Your industry has normalized higher concentration levels and buyers understand this
• Diversification would require compromising profitable relationships or pursuing lower-margin business
• Time-to-exit doesn’t allow meaningful diversification given realistic sales cycles

The goal is to maximize your exit proceeds net of all costs, not to achieve the lowest possible concentration ratio. Sometimes the economically rational choice is to accept the market’s assessment of concentration risk.

Presenting Concentration Context to Buyers

The Concentration Narrative

When concentration exists, how you present it matters. Buyers respond to context and narrative, not just numbers. Prepare materials that address concentration proactively:

Concentration History and Trend: Show how concentration has evolved. Improving trends demonstrate awareness and action. Even stable concentration with documented diversification efforts signals management attention.

Customer Relationship Depth: Provide evidence of relationship stability: contract history, renewal rates, pricing trends, expanded scope over time. Long relationships that have survived market cycles, personnel changes, and competitive pressures carry more weight than recent concentration.

Mutual Dependency Analysis: Demonstrate what your concentrated customers would need to do to replace you. High switching costs, qualification requirements, and service differentiation all contribute to relationship stability that buyers can evaluate.

Customer Financial Health: Provide evidence that concentrated customers are themselves financially stable. Revenue concentration in a growing, well-capitalized customer is different from concentration in a declining one.

Proactive Due Diligence Preparation

Anticipate buyer due diligence requirements and prepare materials before they’re requested:

• Three to five year revenue history by customer showing trend and mix evolution
• Contract summaries with key terms, renewal dates, and pricing mechanisms
• Organizational relationship maps showing all touchpoints with major customers
• Customer reference preparation with talking points for relationship confirmation
• Industry analysis supporting customer stability and growth prospects

Actionable Takeaways

Assess Your Current Position: Calculate your concentration metrics across the framework outlined above. Understand not just your revenue concentration but your profit concentration, growth concentration, and relationship dependency. This baseline informs all subsequent action.

Evaluate Industry and Buyer Context: Before assuming any general concentration framework applies, assess norms in your specific industry and likely buyer type. Professional services, government contracting, and SaaS businesses operate with different expectations than manufacturing or distribution. Your M&A advisor or industry peers can provide context.

Model the Economics Honestly Before Acting: Calculate whether the probability-weighted cost of diversification (including direct costs, executive time, opportunity costs, and risk of failure) exceeds the likely valuation benefit. Include realistic assumptions about sales cycle length, success probability, and margin impact of new customers. Not all concentration warrants management: in some cases, accepting the market’s assessment is economically rational.

Match Strategy to Timeline: If exit is less than 18 months away, focus on contractual protections and relationship documentation. Customer acquisition strategies typically require 12-24 months before moving concentration ratios meaningfully, and enterprise sales cycles can extend longer.

Strengthen Key Contracts Where Possible: Pursue extended terms, better protections, and formal documentation with your largest customers. Assess whether any concessions required are worth the value protection achieved.

Build Institutional Relationships Carefully: Make sure your organization has multi-level relationships with concentrated customers, but position this as service improvement rather than transition preparation, particularly with price-sensitive customers. Maintain service levels with existing customers rather than reallocating resources away from them.

Consider Earn-Out Structures: If you’re confident in customer relationships and want to accelerate exit, proposing contingent pricing structures may be more efficient than years of diversification effort.

Prepare the Narrative: Develop materials that present concentration in context, demonstrating relationship stability, mutual dependency, and proactive management.

Conclusion

Customer concentration is a valuation factor that deserves attention in exit planning. The ranges we’ve discussed (concentration approaching 15-20% beginning to appear in due diligence conversations, higher levels potentially affecting pricing and structure, and very high concentration sometimes reshaping transaction approaches) provide a framework for understanding buyer perspectives based on our observations in US middle-market transactions from 2018-2024. But the specific impact on any transaction depends heavily on industry, buyer type, contract protection, and relationship quality.

We want to be clear about what this framework represents: practitioner observations from our advisory work, not statistically validated research across large transaction databases. Every transaction is different, and sophisticated buyers adjust their concentration concerns based on context that generic frameworks cannot capture. Industry norms vary significantly, and what concerns a buyer in one sector may be entirely acceptable in another.

The composite scenario that opened this article illustrates a pattern we’ve observed: owners often underestimate concentration impact until they’re deep in transaction discussions, when options for addressing it have narrowed. Had that owner identified concentration risk earlier and implemented mitigation strategies (whether through diversification, contractual strengthening, or earn-out positioning), the exit conversation might have unfolded differently. Though we should acknowledge that hindsight is cleaner than foresight, and constraints we cannot see may have limited his options.

For business owners with meaningful runway before their planned exit, the lesson is worth considering: measure your concentration, understand how buyers in your industry and buyer category are likely to evaluate it, and analyze honestly whether addressing it creates value or destroys it. Concentration management isn’t automatically beneficial: diversification carries real costs including direct investment, executive time, opportunity costs, and execution risk. The decision requires economic analysis like any other strategic investment, not an assumption that lower concentration is always better.

Your exit value is substantially determined by decisions you make years before the transaction. Customer concentration is one factor where thoughtful, early analysis can preserve options and value, provided the economics support the investment required.