Customer Concentration Risk

Customer concentration is the most common deal-killer in due diligence — and the most underestimated risk by sellers. If the top customer represents 25% of revenue, the buyer is effectively acquiring a business with a 25% single point of failure. The standard rule: any single customer above 15% of revenue, or top 5 customers above 40%, requires a concentration discount to the valuation and specific retention terms in the deal structure.

1. Quantify Concentration Calculate revenue share for the top 1, 5, 10, and 20 customers. Calculate the Herfindahl-Hirschman Index (HHI) for revenue concentration — sum of squared revenue shares. HHI below 0.10 is diversified. HHI between 0.10-0.25 is moderately concentrated. Above 0.25 is concentrated. The HHI captures concentration across the entire base, not just the top accounts.
2. Assess Relationship Risk For each top-10 customer: who is the relationship owner? Does the relationship depend on the founder or a specific individual who may leave post-acquisition? What is the contract expiration date relative to the close? A top customer whose contract renews 3 months post-close with a relationship held by the departing founder is a concentration AND transition risk.
3. Structure Mitigation For concentrated businesses, structure the deal with retention mechanisms: earnouts tied to top-customer retention, escrow holdbacks released upon renewal, or seller transition support for key accounts. These mechanisms align the seller's incentives with the buyer's risk — the seller earns full value only if the concentrated revenue actually persists.