Glossary
Customer Concentration Risk
Customer concentration risk is the exposure created when a large share of revenue depends on a small number of customers. If one of them leaves shortly after a sale, the earnings the buyer paid for leave with them. At Treewalk we test concentration on every diligence engagement, and it is one of the few findings that changes deal structure rather than just price.
What counts as concentrated
There is no universal threshold, and anyone quoting one is oversimplifying. A single customer above roughly 20 to 25 percent of revenue will draw attention from any buyer or lender. But the percentage alone is the least interesting part of the analysis.
What actually matters is four things: how long the relationship has existed, whether the revenue is recurring or project-based, why the customer buys from this business rather than another, and whether the relationship belongs to the company or to the departing owner.
That last one is decisive. A dominant customer who has bought for fifteen years through a purchasing department is a very different risk from one introduced last year by an owner who is about to leave.
The distinctions we draw
New concentration is worse than old concentration
A customer at a quarter of revenue who only started buying recently has not been tested. There is no history of renewal, no evidence of stickiness, and no way to know whether the relationship survives the person who won it. Long-standing concentration at least demonstrates durability.
One-time projects are not revenue you can buy
This is a distinct problem that hides inside concentration analysis. A single large project can represent a meaningful share of a year’s revenue and never recur. It is not strictly an adjustment to earnings, but it absolutely changes what the business produces next year, and a buyer pricing off that year is paying a multiple for something that happened once.
Concentration can sit upstream too
In trade and project businesses the dependency is often on a contractor or referral source rather than an end customer. We routinely find that most of a target’s commercial work arrives through a single contractor relationship, which is exactly as fragile as customer concentration and tends to get overlooked because it does not appear in a customer list. It moves when that contractor moves.
Contracts are weaker protection than people assume
Sellers routinely offer signed contracts as the answer to concentration, and lawyers will assess them on enforceability. Our view from the financial side is more sceptical, and it is worth saying plainly: contracts are good to have, but in practice most customers can leave whenever they choose. A customer can start a project and cancel it. Enforcement is theoretical for a buyer who wants an ongoing relationship rather than litigation.
So we do not treat a contract as a mitigation on its own. We look at behaviour instead: renewal history, share of the customer’s own spend, switching cost, and whether the buying decision sits with a person or an institution.
Project businesses add a further complication. Where a single customer generates many contracts with many change orders on top, projecting revenue at the contract level stops being meaningful. What we do instead is separate contracts that are genuinely ongoing from those already complete, so a buyer can see what actually carries into next year rather than what the total contract list implies.
How it shows up in a deal
| Finding | Typical consequence |
|---|---|
| Long-standing concentration, institutional relationship | Disclosed, priced in, rarely fatal |
| New or owner-dependent concentration | Escrow holdback or an earnout tied to that customer being retained |
| Large one-time project inside the period | Earnings and multiple reassessed on a sustainable basis |
| Concentration via contractor or referral source | Treated as customer concentration, and often missed |
| Concentration plus a departing owner | The hardest version, and where deals most often restructure |
Customer-specific earnout triggers exist largely for this situation. Where concentration is the actual risk being priced, tying deferred consideration to those specific relationships continuing is a cleaner solution than arguing about the multiple.
What sellers can do about it
Not much quickly, which is why it needs a long runway.
Diversifying revenue genuinely reduces the risk, but takes years. What is achievable in a shorter timeframe is transferring relationships away from the owner and into the business: introducing other people into the account, documenting the relationship, and making the buying decision institutional rather than personal. Buyers can see the difference, and it directly affects how much of the price gets deferred.
Frequently asked questions
What percentage of revenue from one customer is too much?
There is no fixed line, though above roughly 20 to 25 percent most buyers will treat it as a defined risk. The composition matters more than the number: a long-tenured institutional customer at 30 percent is often less troubling than a new owner-introduced customer at 15.
Will concentration kill my deal?
Usually not on its own. It more often changes the structure, moving part of the price into a holdback or an earnout tied to retention. It becomes fatal when combined with a departing owner who personally owns the relationship.
Do long-term contracts fix it?
They help, but less than sellers expect. In practice most customers can exit despite a contract, and pursuing enforcement is not something a buyer wants to inherit. Renewal history and switching cost are stronger evidence than the agreement itself.
How do you test concentration in diligence?
We build revenue by customer across the periods under review, separate recurring work from one-time projects, look at when each major relationship started, and identify which contracts are genuinely ongoing rather than completed. See buy-side due diligence for how that fits the wider process.
Does concentration affect working capital?
Indirectly. A dominant customer often dictates payment terms, which lengthens collection and raises the permanent working capital requirement built into the net working capital peg.
Where to next
If one customer carries a large share of your revenue, that is worth understanding on your own terms before a buyer frames it for you, particularly if the relationship runs through you personally. Our transaction advisory services team tests this on every engagement. To talk through a specific situation, email Avnit Sekhon at avnit.sekhon@treewalk.com.
