Client Concentration

How Client Concentration Impacts a Sale

Does any single customer represent more than 10% of your revenues?  From an evaluation standpoint, some prospective business

Does any single customer represent more than 10% of your revenues? 

From an evaluation standpoint, some prospective business buyers would consider a single customer accounting for 10-15% of a company’s sales as a major negative.  Almost all prospective buyers would consider client concentration of 30% or more in just two to three customers as a big problem that would have a significant impact on salability and/or the terms and structure of a sale.

Prior to selling your business, any efforts to reduce customer concentration by diversifying your client base will be beneficial to salability, valuation and maximizing the cash received at closing. If there is a customer concentration concern, a lender may decline the loan or will likely only approve a partial loan to the buyer. This reduced loan amount also reduces the amount of upfront cash that a seller can expect to receive at closing.  To address customer concentration issues, most prospective buyers will try to structure a “contingent earn-out” that is paid to the seller over time and is dependent on the future revenues or profitability derived from the company’s largest customers.  If one of those customers is lost, the seller may never receive the contingent portion of the negotiated purchase price.

Here is a good article that further speaks on the topic: How business owners can mitigate the risk of customer concentration

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