Why I Always Study Customer Concentration Before Buying a Business

One of the first things I ask when reviewing a potential acquisition is: How concentrated is the customer base? At first, I didn’t pay much attention to this metric. I thought revenue was revenue if the numbers looked good, the risk seemed manageable. But I’ve since learned that customer concentration can make or break a business.

Today, I study customer concentration as closely as I study profit margins or growth rates. A company with 70% of its revenue tied to one client is fundamentally different from one with 1,000 customers, each contributing 1%. Customer concentration tells me how resilient or fragile the business really is.

In this article, I’ll explain why I put so much emphasis on concentration, the warning signs I’ve learned to spot, and the framework I use to judge whether a business’s customer base is strong enough to withstand change.

Why Customer Concentration Matters

On the surface, revenue is revenue. But not all revenue is equally reliable. A customer base that is broad and diverse provides stability. A concentrated base creates risk.

If a single customer accounts for a large portion of revenue, the entire business depends on that relationship. If the customer leaves, delays payment, or renegotiates terms, the business can collapse overnight.

For me as a buyer, that risk is unacceptable unless it’s priced into the deal.

My First Lesson in Customer Concentration

Early in my acquisition journey, I almost bought a company that generated strong cash flow. But during diligence, I discovered that one customer made up nearly 65% of revenue. When I pressed for details, I learned the customer’s contract was up for renewal within the year.

If that customer walked away, the company would be crippled. I walked from the deal, and within months, I found out that the contract had, in fact, been lost. That close call taught me never to ignore concentration risk again.

How I Measure Customer Concentration

When I review a company, I measure customer concentration in several ways:

• Top customer percentage: What percentage of revenue comes from the single largest customer?
• Top five customers: How much combined revenue comes from the top five accounts?
• Contract terms: Are customers under long-term contracts, or is revenue dependent on handshake agreements?
• Industry concentration: Even if there are many customers, are they all in the same industry? If so, the risk is still high.

These numbers tell me whether the business has true diversification or whether it’s vulnerable to a single relationship.

Acceptable Levels of Concentration

Not all concentration is a dealbreaker. In some industries, it’s normal for a few clients to dominate revenue. What matters is how manageable the risk is.

• Under 20% of the top customers: Generally safe.
• 20–40%: Risky, but manageable with strong contracts and relationships.
• 40%+: Red flag. The deal must be priced aggressively, and I need contingency plans.

If one customer makes up more than half the revenue, I tread very carefully.

Questions I Ask Sellers

When I see a concentration risk, I ask the seller direct questions:

• How long has the customer been with you?
• Who owns the relationship, just you, or the whole team?
• What is the renewal history?
• Do you have written agreements?
• What competitors are chasing this customer?

The answers reveal whether the relationship is truly secure or whether the business is built on shaky ground.

How I Protect Myself in Deals With Concentration

If I decide to move forward despite concentration, I protect myself in several ways:

• Discount the valuation: I pay less upfront to account for risk.
• Structure earnouts: I tie part of the price to customer retention.
• Negotiate transition support: I require the seller to stay engaged until the risk stabilizes.
• Diversify quickly post-close: I focus immediately on expanding the customer base.

These protections allow me to manage the risk without overexposing myself.

The Hidden Side of Concentration: Key Employees

Sometimes, concentration risk isn’t just about customers, it’s about employees. If one salesperson or account manager owns the relationship with a major client, losing that employee is as dangerous as losing the customer.

That’s why I also study who maintains customer relationships. If everything depends on one individual, I plan retention strategies before closing.

Mistakes I’ve Made

I’ve underestimated concentration before. In one deal, I assumed that because contracts existed, the risk was low. What I didn’t factor in was how easily the customer could terminate those contracts with short notice. When they left, revenue dipped sharply.

Another time, I ignored industry concentration. The company had dozens of customers, but they were all in the same sector. When that sector slowed, revenue fell across the board. I’ve since learned to diversify not just by customer count but by industry as well.

Why Customer Concentration Impacts Valuation

Valuation is ultimately about risk. A business with broad customer diversity commands higher multiples. A business with a heavy concentration commands lower ones.

That’s why I always adjust my offers based on concentration levels. Strong diversification allows me to pay more confidently. High concentration forces me to discount the price or restructure terms.

Final Thoughts

Customer concentration is one of the most important factors I study before buying a business. Revenue without diversification is fragile, and fragility is the last thing I want in an acquisition.

I’ve learned to respect the risk, ask tough questions, and build protections into deals. Because in the end, I’m not just buying revenue, I’m buying reliability. And reliability comes from having a customer base that no single relationship can destroy.

I continue sharing my insights on acquisitions, private equity, and real estate at DrConnorRobertson.com, where I document the lessons I’ve learned deal by deal.