Customer concentration

Definition

How much of the revenue rides on the largest customer or few.

Why It Matters

Above roughly a third of revenue in one customer, lenders balk and buyers should too, because you would be buying a relationship you do not have and cannot inherit by contract. Diligence should map the top few accounts by revenue and by tenure, since one account that can leave on thirty days' notice is the risk the multiple is quietly paying for.

In numbers: A $2,000,000-revenue company whose top customer is $700,000 of it is 35% concentrated: lenders start asking questions near 20%, and a buyer models losing that account in year one against the loan payment before deciding what the business is worth.