Customer Concentration
Also known as: Revenue Concentration, Customer Risk
Customer concentration measures how much of a company’s revenue depends on its largest customers, a key risk that can lower valuation or reshape a deal.
Customer concentration describes how much of a company’s revenue comes from a small number of customers. A business where one client drives 40% of sales carries far more risk than one where the top ten clients each contribute a few percent.
Why buyers care
If a single customer can leave and erase a large share of revenue overnight, the future cash flows a buyer is paying for are fragile. High concentration commonly leads to a lower valuation multiple, a larger portion of the price held back in an earnout, or a deal that does not happen at all.
How it is assessed
A financial due diligence review breaks revenue down by customer over several years, looks at the length and terms of key contracts, and tests how durable those relationships really are. For searchers and lower middle market private equity buyers, concentration is one of the first things examined because it speaks directly to how safe the investment is.