Customer concentration: the number that decides your multiple
If your top customer accounts for 30% of revenue, you don't have a business to sell. You have a job with that customer.
Every buyer has a different threshold for pain, but the rule of thumb is consistent: if a single customer accounts for more than 20% of your revenue, or your top five account for more than 50%, your valuation is going to suffer.
In metal fabrication and specialized manufacturing, this is common. You land a great contract with a major aerospace or oil & gas client, you scale up to serve them, and suddenly they are half your book of business. You feel successful because the revenue is there. A buyer feels terrified because if that one purchasing manager leaves or the company changes sourcing strategies, the business collapses.
When buyers see high customer concentration, they do one of three things: 1. They walk away. 2. They drastically reduce the multiple they are willing to pay. 3. They shift a massive portion of the purchase price into an earnout, meaning you only get paid if that key customer stays for the next three years.
You cannot fix customer concentration in diligence. You have to fix it in the year or two before you go to market.
That means making the uncomfortable choice to direct sales efforts toward smaller, less profitable accounts simply to diversify the base. It means saying no to taking on more volume from your biggest client if it skews the ratio further.
When I work with owners in the 'Getting Ready' stage, we run a concentration analysis first. If the number is too high, we delay going to market. Selling a highly concentrated business is just giving away your life's work at a steep discount. You are better off holding it, diversifying the revenue, and selling a more stable asset later.