Customer Concentration: The Silent Killer in SMB Deals

1. Why 40% Is the Red Line (and 30% Is Flirting with It)

In SMB deals, when one customer accounts for 40% or more of total revenue, you’re standing on a trapdoor. Lose that client, and your debt coverage, working capital, and margin of safety evaporate overnight.

Industry advisors say the ideal top-customer concentration should sit below 5–10% of total revenue to avoid red-flag status (Morgan & Westfield). Anything higher shifts leverage to the customer — not you.

Example:
A B2B cleaning company does $1M in annual revenue. One corporate client accounts for $450K. If that client leaves after close, the buyer isn’t left with $550K of “stable business.” They’re left with debt they can’t service.

Why it matters:
Banks look at concentration like a live grenade. If one customer holds the pin, financing terms tighten — or disappear.

Your move: Map the top 5 customers by revenue share. If the top 1 exceeds 30–40%, flag it. If the top 2 make up over 60%, expect pushback from lenders and higher risk pricing.

2. How to Read the Customer Mix Like a Lender

Sellers love to talk about “great relationships.” Lenders talk about durability of revenue.

Example:
A packaging company has three “anchor clients” that account for 75% of revenue. All their contracts are handshake deals, no term length, no exclusivity.

To a buyer, that’s exposure. To a bank, that’s radioactive.

Your move: Break down revenue by customer for at least the past 2–3 years. Identify churn or retention trends for each major account. Check contract terms, renewal clauses, and any exclusivity.

Don’t just ask, “How many customers?”
Ask, “What happens if Customer X walks tomorrow?”

3. When One Customer Walks, the Floor Drops Out

Customer concentration doesn’t just ding your margins. It can collapse the deal math overnight.

Example:
A specialty parts supplier shows $2M revenue and $500K SDE. But 60% of that comes from one auto manufacturer. Six months post-close, the client switches suppliers.
Result: $1.2M of revenue gone. $300K of debt service still due. Game over.

Why it matters:

• SBA lenders calculate coverage ratios assuming stable cash flow.
• High concentration creates instability lenders won’t underwrite.
• You inherit the risk without the leverage to negotiate better terms.

Your move: Stress test the deal at 70% of projected revenue. If DSCR collapses, so will your financing.

4. Pricing or Structuring Around the Risk

Not all concentration is fatal.
Sometimes it’s just leverage.

Example:
A niche IT services company does $800K, with one loyal anchor client making up 50%. That client has a 5-year contract with penalties for early exit. That’s risk, but it’s also a negotiation chip.

Your move:

• Price the risk in: Lower your offer to reflect customer fragility.
• Structure the deal: Use holdbacks, seller financing, or earnouts tied to key customer retention.
• Get it on paper: If it’s handshake-only, get real contracts signed before close.

5. Don’t Buy a Hostage Situation

Customer concentration is rarely obvious in the glossy CIM. It hides behind “stable recurring revenue” and “long-standing client relationships.”

Example:
A local print shop advertises “stable $900K annual revenue.”
In reality, 65% comes from one school district contract that’s up for bid next year.

If one email from a client can nuke your deal, you don’t own the business. They do.

Your move: Ask for the customer list by revenue share early. Read contracts like your down payment depends on it — because it does. If the seller refuses to share, that’s a red flag in itself.

Bottom Line: Diversification Buys You Breathing Room

A healthy business isn’t just profitable — it’s resilient.
If one customer sneezing can trigger a cash flow coma, it’s not resilient.

• 40%+ from one customer = danger zone.
• Handshake deals ≠ security.
• If it can’t survive losing a single client, it’s not a stable business.

Disclaimer