- Customer concentration is one of the fastest ways to compress a multiple.
Here is the rule most buyers use.
If one customer represents more than 20 to 25 percent of revenue, risk increases materially.
If one customer represents 40 percent or more, you do not have a diversified business.
You have a dependency.
Dependencies reduce multiples.
Let’s look at it practically.
Company A:
One million dollars in EBITDA.
No customer over 10 percent of revenue.
- Stable margins.
Company B:
One million dollars in EBITDA.
One customer represents 45 percent of revenue.
Same margins.
These businesses will not receive the same multiple.
The second business often trades one to two turns lower.
On a one million dollar EBITDA company, that difference can mean two million dollars or more in enterprise value.
Why buyers care:
If that one customer leaves after acquisition, the loan may default.
Banks know this.
So they reduce leverage, increase equity requirements, or decline the deal entirely.
You may say, “We have worked with them for fifteen years.”
Buyers hear, “What happens if procurement changes leadership?”
Longevity does not eliminate risk.
Diversification does.
If concentration risk exists, the solution is planning, not panic.
Twelve to twenty-four months before exit, you can:
Broaden the client base
Renegotiate longer-term agreements
Increase margins on smaller accounts
Reduce dependency ratios
Preparation turns a red flag into a managed risk.
If you would like to review whether your revenue mix is supporting or suppressing your multiple, we can do that in a confidential Readiness Review.
Multiples expand when risk contracts.