Buyers-
If you’ve looked at more than a handful of deals, you’ve run into this line in the CIM: “Top customer represents X% of revenue.”
Most buyers see that number and do one of two things. They either panic and walk, or they shrug it off because the SDE looks good. Both reactions skip the actual work.
Here’s a real shape of deal I see often.
The setup: a $2.1M HVAC business with one big customer
A commercial HVAC service company does $2.1M in revenue and $480,000 in SDE.
One customer — a regional property management group — accounts for $840,000 of that revenue. Roughly 40%.
On paper, that’s a red flag. Plenty of buyers would stop reading right there.
But that number alone doesn’t tell you anything about risk. It tells you there’s a concentration. It doesn’t tell you whether that concentration is dangerous.
Where it actually gets dangerous
The real question isn’t “how much revenue comes from this one customer.” It’s “what happens if they leave, and how would I know it’s coming.”
That means digging into things the top-line percentage doesn’t show you.
How long has the relationship lasted? Three years is a different risk profile than fifteen.
Is there a contract, and what’s the term and renewal structure? A month-to-month handshake is not the same as a three-year service agreement with two option years.
Who owns the relationship — the business, or the seller personally? If the property management group only trusts the deal because they trust the seller by name, that revenue may not survive a change of ownership no matter what the contract says.
What would it cost that customer to switch? If the HVAC company is embedded in their maintenance systems and switching means re-qualifying a new vendor across a dozen properties, that’s real friction working in your favor. If it’s a commodity service they could swap out in thirty days, it isn’t.
This is the part sellers and brokers sometimes gloss over. Not because they’re hiding it — because “40% concentration” as a headline number feels like the whole story, and digging into contract terms and relationship ownership takes more work than most people want to do before an LOI.
Don’t skip it. This is exactly the kind of thing that should get surfaced before you’re deep into due diligence, not during it.
I’ve seen both versions of this deal play out. One buyer walked away from a business with 35% concentration because the number alone scared him off — and missed a company with a nine-year relationship locked into a renewing municipal contract. Another buyer chased a business with 25% concentration because the percentage looked safer, and found out during diligence that the account was month-to-month and the relationship ran entirely through the seller’s cell phone. The lower number was the riskier deal.
That’s the trap. Concentration percentage feels like a clean, comparable metric across deals. It isn’t. It’s a starting point for questions, not an answer by itself.
How to actually price the risk instead of just reacting to it
Once you know what you’re dealing with, you have real options — not just “buy” or “walk.”
You can structure part of the purchase price as an earnout tied to retention of that customer for 12–24 months post-close. If the relationship is as durable as the seller claims, this costs the seller nothing. If it isn’t, you didn’t overpay for revenue that disappeared.
You can negotiate a lower multiple on the concentrated portion of revenue and a full multiple on the diversified base. Some buyers split the SDE mentally — full credit for the $360K coming from the other 200+ customers, a discounted multiple applied to the $120K in SDE tied to the concentrated account.
You can ask the seller to personally introduce you to that customer’s decision-maker before close, and gauge the relationship directly instead of taking it on faith.
You can require a signed contract extension with that customer as a closing condition, if one doesn’t already exist.
None of these make the risk disappear. They price it, or they transfer it, instead of ignoring it.
The mistake I see most often
The mistake isn’t buying a business with customer concentration. Plenty of great businesses have it, especially in commercial service niches where a handful of large accounts are normal.
The mistake is treating the percentage as the entire analysis.
A 40% concentration with a five-year contract, embedded switching costs, and a relationship that lives with the company — not the seller — is a very different acquisition than a 40% concentration on a handshake deal that could walk in thirty days.
Same number. Completely different risk.
Takeaway: don’t price customer concentration off the percentage in the CIM. Price it off contract term, relationship ownership, and switching cost — then structure the deal (earnout, multiple split, closing conditions) to match what you actually find.
If you’re evaluating an acquisition right now and want a second set of eyes on something like this, let’s talk about your acquisition criteria.