Customer concentration risk is what buyers call it when too much of your revenue comes from too few clients. In Australian M&A terms, the threshold that starts to matter is roughly 20–25% from a single customer. Above 30%, most buyers will reprice the deal. Above 50%, the pool of willing buyers shrinks dramatically. The practical effect is that what looks like a straightforward valuation exercise — normalised EBITDA times a multiple — gets complicated by a risk buyers weren’t expecting to price.
You may have built a great business. The concentration problem doesn’t care.
What Is Customer Concentration?
Customer concentration is the degree to which your business depends on a small number of clients for its revenue. A business with 200 clients generating roughly equal revenue has almost no concentration risk. A business with four clients, where one generates 45% of turnover, has severe concentration risk — even if the revenue is otherwise excellent.
Buyers measure it the same way you’d expect: they ask for a breakdown of revenue by client, usually over three years. They’re looking at who your top five clients are as a percentage of total revenue, whether that mix has been stable or shifting, and how long each major client relationship has been in place (a 10-year relationship is less scary than a one-year contract that happens to be large).
The concern isn’t just that the big client might leave. It’s that a buyer is paying for a forward-looking stream of earnings — and if a meaningful chunk of those earnings is tied to a decision one person at one company makes, the buyer is exposed to something they can’t control and didn’t agree to take on. Buyers are not optimistic people by nature. That’s not a criticism — it’s a professional requirement. Their job is to price risk, and this is a visible, quantifiable one.
The 30% Threshold — When Buyers Get Uncomfortable
There’s no official line in Australian M&A where concentration becomes a problem, but 25–30% from a single client is where most experienced buyers start making notes. Some rules of thumb that circulate in the market:
- Below 20%: minor, usually unremarked
- 20–30%: noted, may lead to questions, unlikely to affect multiple significantly
- 30–40%: pricing impact likely, typically 0.25x–0.75x reduction in EBITDA multiple
- 40–50%: significant impact; earn-out discussions likely
- Above 50%: deal structure changes materially; some buyers won’t proceed
These aren’t rules — they’re general expectations. Context matters. A business with a 40% client that has been on a five-year rolling contract, has a government mandate for the service, and has been renewing for a decade is different from a business where 40% of revenue came from a single project that may or may not repeat. Buyers will assess the facts; the percentages just tell them where to look.
How Concentration Affects Your EBITDA Multiple
A buyer considering your business is comparing it to alternatives. All else equal, a business with diversified revenue is lower-risk and therefore worth more per dollar of earnings than a concentrated one. That difference shows up in the multiple they apply to your normalised EBITDA.
A business in professional services with $800,000 normalised EBITDA might attract a 4.5x multiple from the right buyer — that’s $3.6 million. If 35% of that EBITDA is generated from one client who has no long-term contract, a buyer will typically reprice to 3.5x or 3.75x, and may want a portion of the price held in escrow or structured as an earn-out. The difference between 4.5x and 3.5x on $800,000 EBITDA is $800,000 out of the seller’s pocket.
That’s not a theoretical number. It’s the kind of gap that shows up in real negotiations, and it usually comes as a surprise to sellers who hadn’t factored it in.
Understanding where your business sits on the EBITDA multiples by industry spectrum is useful context — but the multiple range for your industry assumes a reasonably diversified revenue base. Concentration is one of the things that puts you at the bottom of the range.
Customer Concentration vs Owner Dependence — Understanding the Difference
These two things often get conflated, and they’re worth separating.
Owner dependence is the risk that the business needs you — the owner — to function. Customer concentration is the risk that the business needs one client to function. Both reduce your multiple, but they do so in different ways.
Owner dependence means a buyer needs to retain you post-sale (via an earn-out or consulting period) or trust that your relationships will transfer to someone else on your team. Customer concentration means the buyer is exposed to the economics of a decision made by a third party — your customer — that neither you nor they can control.
The distinction matters because the remedies are different. Owner dependence can be addressed by building a management team, delegating client relationships, and demonstrating that the business runs without you present. Customer concentration can only be addressed by growing the rest of your client base or by changing how you approach the sale.
If you have both — a business where you personally manage a client that generates 40% of your revenue — the two risks compound, and the discount can be severe. This is worth thinking about as part of preparing your business for sale, ideally two to three years before you intend to exit.
Reducing Concentration Before You Sell
The obvious answer is to grow your other clients until the big one represents a smaller proportion of total revenue. That’s correct, and it’s also not always fast.
A landscaping contractor I worked with had built a genuinely excellent operation — 12-person crew, solid margins, a reputation that had been earned over 15 years. The problem was that a single commercial property management group had been their anchor client for most of that time. When they came to us, that client was generating 47% of revenue. We recommended two years of deliberate client diversification before going to market. The owner did the work: he secured two new commercial contracts, negotiated a formal services agreement with the existing client (which helped the story), and came back with concentration down to 31%. Not perfect — but sellable. The multiple he achieved was meaningfully higher than what he’d have gotten two years earlier.
The practical steps that move the number:
- Actively pursue clients of similar size to reduce the percentage held by your anchor client
- Formalize existing client relationships with written contracts where possible — a contract doesn’t eliminate concentration risk but it gives buyers something to hang their confidence on
- If you can’t reduce the percentage quickly, increase the contract length and renewal certainty
The timeline matters. Meaningful diversification usually takes 18 months to three years. If you’re planning to sell in 12 months and your top client is 45% of revenue, the better strategy may be to address the story rather than the number.
When You Can’t Fix It — How to Present It to Buyers
Not everyone has three years. Some business owners decide to sell when they decide to sell, and the concentration is what it is. That’s fine — but it changes your approach.
The key is that buyers discount what they don’t understand. A concentration situation that is explained, contextualised, and framed honestly is less frightening than one that surfaces unexpectedly in due diligence. Buyers who feel like you’ve disclosed fully and managed this situation thoughtfully will price it more reasonably than buyers who feel like they nearly missed it.
What this looks like in practice: front-foot the issue in your information memorandum rather than burying it. Explain the nature of the client relationship — how long it has been in place, why the client continues to work with you, what their alternatives are, what the switching costs are for them. If you have communications that show the relationship is strong, include them. If the client would provide a reference, that can be worth more than a page of analysis.
You should also think about buyer type. A strategic buyer — a competitor or adjacent business — who already knows your major client is better positioned to assess the real risk than a financial buyer who has to take your word for it. Part of what buyers look for when they assess your business is whether the current revenue base is stable under new ownership. A strategic buyer who has an existing relationship with your anchor client can answer that question directly; a private equity firm cannot.
The earn-out is often the compromise position. It allows the buyer to pay a full price if the major client stays, and a reduced price if they don’t. It’s not an ideal outcome for a seller who wants clean cash at completion — but it’s often better than a straight discount, because it preserves the upside if the relationship holds.
What This Means in Practice
If you’re a year or more away from selling and customer concentration is a risk in your business, the time to act is now. If you’re six months away, the conversation changes to how to tell the story and who the right buyers are. If you’re ready to sell today with 50% concentration in one client, you need an adviser who has navigated this before — because the buyer selection and deal structure will matter more than the asking price you start with.
Customer concentration isn’t a fatal problem. It’s a pricing problem. The difference between solving it and managing it is largely a question of how much runway you have.
If you’d like to understand how concentration and other risk factors affect your specific business value, our valuation calculator is a starting point. Or talk to us directly — we’ve worked through this with enough sellers to know what works and what doesn’t.