The “Silent Killer” of Valuation
Customer Concentration
You’ve spent years building a business you love. Revenue is climbing, profits are healthy, and buyers are circling. Then the offers come in…and they’re all 20 to 30 percent lower than you expected. What happened?
The culprit is one of the quietest but most lethal valuation killers in M&A: customer concentration.
A few months ago, I met a founder whose company generated nearly $12 million a year in revenue. On paper, it looked like a textbook success. But there was a hidden flaw. Two customers accounted for 65% of total sales. When they went to market, every buyer asked the same question first:
What happens if one of those clients leaves?
The founder had assumed that strong personal relationships and long-term contracts would comfort buyers. They didn’t. Instead, those relationships created risk. Buyers priced that risk aggressively, shaving millions off the offers.
This isn’t an isolated story. According to GF Data1, businesses with heavy customer concentration, where any single customer represents more than 20% of revenue, often face valuation discounts of 15–40%. Private equity firms and strategic buyers view these companies as ticking time bombs. One lost contract, and the entire financial model collapses.
A single customer controlling more than 20% of revenue can quietly erase years of hard work at the closing table.
The irony? Many founders believe customer concentration is proof of strength. After all, landing a “whale” client is celebrated in sales meetings. But what feels like a trophy to an owner looks like fragility to an investor. Dependence equals risk, and risk reduces price.
The good news is that this silent killer is both visible and treatable…if you act early.
Diversifying revenue isn’t about chasing dozens of small accounts overnight. It’s about creating a deliberate plan to spread dependence across industries, geographies, and contract types. I’ve seen owners who, within 18 to 24 months, reduced their largest customer from 40% of revenue to under 15%. When they went back to market, the company commanded a full extra turn of EBITDA in valuation, translating into millions of dollars more at closing.
If you’re considering an exit in the next three to five years, start now. Map your revenue by customer. Identify where any single relationship crosses the 15–20% threshold. Build cross-selling programs, pursue adjacent markets, or launch a recurring revenue stream to flatten the curve. Even modest progress can shift a buyer’s perception from “key-person risk” to “scalable platform.”
Customer concentration is seductive because it hides behind success. The larger the account, the harder it is to walk away, and the more you feel you can’t afford to diversify. But the market is unforgiving. Buyers reward resilience, not reliance.
David Hermann, CEO of hermanngroup and M&A Advisor/Broker at Sunbelt Business Brokers of Colorado
David Hermann is a transformative advisor and strategist who turns complex business challenges into extraordinary successes. Known for driving over $500 million in documented financial improvements for clients, David partners with C-suite leaders to unlock their full potential. With 60+ speaking engagements, numerous publications, and a spot in the top 1% of Consulting Voices and top 1% of the Social Selling Index on LinkedIn, he’s passionate about making strategy, change leadership, and operations insightful and accessible.
GF Data, a long-running private equity deal database, regularly reports in its Key Deal Terms and Valuation Trends studies that companies with a single customer representing 20% or more of revenue tend to trade at 15–40% lower EBITDA multiples than diversified peers. These figures are based on their analysis of hundreds of lower-middle-market transactions (typically $10–250M enterprise value).