The Importance of Customer Diversification in Small Business Acquisitions
When I buy a business, one of the first things I look at is customer concentration. I’ve learned through experience that customer diversification is one of the most important indicators of stability. A company might show strong revenue today, but if 60% of that revenue comes from a single client, the business is fragile. If that client leaves, the value of the business collapses.
Over time, I’ve developed a rule of thumb: no matter how good the financials look, I want customer diversification. Businesses with a broad, loyal base of customers are resilient, transferable, and valuable. In this article, I’ll explain why diversification matters so much, the mistakes I’ve made by ignoring it, and the framework I use today to evaluate and strengthen customer concentration.
Why Customer Diversification Matters
Customer diversification matters because it spreads risk. If revenue is tied to a single customer or a small handful, the business’s fortunes rise and fall with those accounts. Diversification ensures:
- Stability of revenue, even if one customer leaves
- Greater bargaining power since no single client controls terms
- Stronger valuation multiples from buyers who want reduced risk
- Easier financing since lenders prefer diversified cash flow
I view diversification as insurance. It protects the business from sudden shocks.
My Early Mistakes
In one of my early acquisitions, I overlooked the fact that the top customer accounted for nearly 50% of revenue. I was focused on profitability and growth potential, not risk. Within a year, that client renegotiated pricing and reduced volume. Profitability shrank by almost a third.
In another case, I assumed a strong relationship with one key client would continue after the seller left. Instead, that client left out of loyalty to the seller personally. Revenue fell sharply.
Both experiences taught me never to ignore concentration risk.
How I Evaluate Customer Diversification
When I study a company, I ask:
- What percentage of revenue comes from the top one, three, and five customers?
- How many total active customers does the company serve?
- Are customers spread across industries or concentrated in one sector?
- Are customer relationships tied to the seller personally or to the company brand?
- What does churn look like over the past three years?
These questions reveal how stable the revenue base really is.
Signs of Strong Diversification
- No single customer accounts for more than 10–15% of revenue
- Hundreds or thousands of active accounts
- Customers spread across geographies or industries
- Contracts or recurring agreements with many small and mid-sized customers
Signs of Weak Diversification
- One or two customer aaccounts ccount for 30–60% of revenue
- Revenue is tied to a single industry or client type
- Relationships depend heavily on the seller’s personal involvement
- No written agreements securing customer commitments
If I see these signs, I either adjust valuation or walk away.
How I Protect Against Concentration Risk
When customer concentration is high but the business is otherwise strong, I protect myself by:
- Negotiating lower purchase prices or earnouts based on customer retention
- Requiring seller involvement in the transition to help retain key clients
- Building diversification strategies immediately after closing
- Setting aside cash reserves in case of churn
How I Strengthen Diversification Post-Acquisition
After buying, I work to broaden the base:
- Expanding marketing to attract new clients
- Developing products or services that appeal to different segments
- Encouraging referrals and partnerships to grow the customer mix
- Offering incentives for existing clients to refer peers
Diversification is a long-term play, but it builds resilience.
Why Diversification Impacts Valuation
Businesses with diversified customers often command higher multiples because buyers know revenue is more stable. Lenders also prefer these companies. Concentrated businesses, by contrast, sell for discounts.
That’s why I always study customer concentration early in diligence.
Final Thoughts
I’ve learned that customer diversification is one of the most important indicators of acquisition success. A business with a broad, loyal customer base is far safer than one dependent on a few accounts.
That’s why I evaluate concentration risk carefully, adjust valuation accordingly, and prioritize diversification strategies after closing.
Because at the end of the day, a business is only as strong as the foundation of its customers, and I want that foundation spread wide, not balanced on a single pillar.
I continue sharing my acquisition frameworks, strategies, and lessons at DrConnorRobertson.com, where I document the realities of building durable businesses deal by deal.