Customer Concentration Above $20 Million: The Threshold That Reprices the Deal

An owner preparing a sale around $20 million or more often has a clean EBITDA number and a customer list with one name, or a handful of names, doing a large share of the work. The earnings can be real. A large buyer still prices the chance that the name leaves, rebids, or asks for different terms after closing. Above this size, the book of customers is part of the underwriting. It can move the offer even when the earnings hold.

The short answer: concentration is one customer, or a small group, measured as a share of revenue and as a share of gross profit. Those shares diverge when one account is high-margin or low-margin. A main-street buyer may live with one large account. A private equity firm, an independent sponsor, or a strategic buyer often reprices the deal as a single customer moves through the teens and toward a quarter or a third of the book. Contract length, switching cost, and the reason the customer stays weigh as much as the percentage. The offer can arrive at a lower multiple, with an earn-out on the named accounts, a larger rollover, a holdback, a longer exclusive, or a walk.

Concentration beside owner dependence, across company sizes, is in client concentration, key-person risk, and other hidden value killers. The contracted book a large buyer will pay for is recurring revenue, contracts, and the book a large buyer will pay for. This article is how price and structure move once the sale is above about $20 million.

This article is not legal, tax, or lending advice. Contract terms, assignment, change-of-control consent, earn-out tax, and what a lender will advance are fact-specific. A lawyer, a CPA, and, when debt is in the stack, the buyer's lender own those questions. Nothing here is a quote for your company.

If you are still placing the company on the size line, start with what changes when a business sale crosses $20 million and a confidential business valuation. Who sits across the table is selling to private equity versus a strategic buyer. Who should run the process is broker versus M&A advisor.

What Concentration Actually Measures

Concentration is a share. The useful question is a share of what, and of whose decision.

Revenue share

Use trailing revenue, usually the last twelve months, and the two or three years before that. One customer at a large share is the obvious case. Five customers who together are most of the company is the same problem in a wider frame. A company can look fine on any single name and still be concentrated if the top handful share an end market or renew in the same quarter.

Name customers the way decisions are made. A parent and three subsidiaries under one procurement office are one customer. A brand that pays through a buying group may be one relationship. Fifty ship-to locations are still one decision if one person can turn the volume off.

Gross profit share

Revenue share and profit share diverge when one account is priced differently. A customer that is a fifth of revenue and a third of gross profit is a larger risk than the sales line shows. The cash a buyer underwrites lives in the margin.

A customer that is a third of revenue and a tenth of gross profit is a volume account. It can tie up working capital, set a price the market expects, and leave a hole in the plant or the crew. It is a different hole from a high-margin account of the same size. If you bring only revenue, the buyer will build the margin cut in a quality of earnings review.

Show gross profit after the direct cost of serving the account: labor, materials, freight, rebates, and a dedicated team. A flat overhead spread is less persuasive than the costs that actually follow the customer.

Why the Bar Tightens Above About $20 Million

A buyer writing a personal check can decide that one big account is acceptable because they will sit in the relationship. That is a common Main Street posture. It is a different standard from a fund, a sponsor, or a corporate development team.

Above about $20 million, the buyer is usually committing other people's capital, or folding you into a company that already has a board. They price the risk that the account leaves, rebids, or demands price and terms after closing, when your name is no longer why they stay. What a $50 million buyer underwrites that a main-street buyer ignores is the wider version of that shift. Concentration is one of the pages they open early.

There is no universal cutoff, and a single percentage sold as a rule will not match how these buyers talk. They often get uncomfortable as one customer moves through the teens and toward a quarter or a third of revenue. That is a description of the conversation, not a quoted threshold. A smaller share can still worry them. A larger share can still clear. A customer with a contract ending in a few months can worry a buyer more than a larger customer on a multi-year agreement with real switching costs.

Three facts sit beside the percentage.

Contract length. A renewal that is weeks away is different from a term that runs through the period a buyer expects to hold the company. Terms that either side can cancel on short notice are a relationship, not a lock.

Switching cost. If the customer must retool, retrain, requalify a vendor, or rewrite a specification to leave, the buyer can underwrite some of that friction. If the customer can move the work with an email, the percentage carries more of the risk. A claim that they would never leave is not a switching cost.

Why the customer stays. Specification, price, a personal tie to the founder, habit, or a contract they would rather exit are different stories. If the reason is you, the buyer is also running the management test: whether anyone else already holds the relationship. Concentration and founder dependence on the same account get priced as one risk.

Private equity and an independent sponsor usually need the earnings to support debt and a later exit. One account that can remove a large piece of EBITDA in a single year is hard to leverage and hard to sell the next time. A strategic buyer may care more about whether your customer overlaps theirs, competes with theirs, or is them. The same book can draw a lower price from one buyer and a serious conversation from another, which is why more than one buyer should see the file.

The pattern is the same in a specialty manufacturer in Ohio, a services firm in Texas, a distributor in Georgia, and a contractor in Florida. The paperwork changes. The question does not: how much of the cash flow depends on a decision the buyer does not control.

How the Offer Moves When the Book Is Thin

On a sale of this size, the customer list often changes the number and the path of the cash, even when nobody argues with the earnings.

A lower multiple is the direct version. The buyer uses the same EBITDA and pays less per dollar because a slice of those earnings is less reliable. Sometimes they adjust the earnings and treat part of the large account as if it might not remain. Ask which one they are doing. An earnings cut and a multiple cut stacked together should be visible before you grant exclusivity.

Structure keeps a headline and moves the risk to a later date:

• An earn-out tied to retention of the named accounts, or to their revenue or gross profit, in the first years after closing. How earn-outs are built is the role of earn-outs, holdbacks, and contingent payments. A test that only asks whether the customer is still a customer can pay out after they cut price, volume, or margin.
• A larger rollover, so more of your proceeds stay in the company and move with the book. What staying in means is PE recap versus a full exit.
• A holdback or escrow that is larger, or that lasts longer, because of the customer rather than a general indemnity. A holdback that waits on a renewal is an earn-out with another name.
• A longer exclusive, so the buyer can speak with the account or wait for a renewal before they must close.
• A walk. Some buyers will not take the risk at a price you can accept. Hear that before you shut out everyone else.

Headline EBITDA can be fine and the offer can still move. A quality-of-earnings report can confirm the number, and the buyer can change the terms the next week. Clean books make the risk easier to see. They do not retire it.

This illustration uses round numbers. It is not a valuation and not a market multiple. Imagine a company a buyer is already treating as a sale around $20 million: about $4 million of adjusted EBITDA. One customer is about a third of revenue and closer to half of gross profit, because that work is priced better than the rest. The earnings can stay near $4 million while the offer changes. One buyer pays less for each dollar of EBITDA. Another holds a higher headline and places a large share in an earn-out that pays only if that customer still produces agreed revenue or margin on agreed dates. A third asks you to roll more equity. A fourth leaves.

If two offers carry a similar headline and different exposure to that customer, compare cash, timing, and conditions, including a renewal at a lower price, before you pick the larger headline.

What a Buyer Will Ask to See

Expect a customer schedule before a letter of intent is final, and a harder version in diligence. What happens during due diligence is the month those requests fill a room. The customer page usually comes early because it can change price.

Buyers ask for a practical set of facts:

• Trailing revenue by customer for the last twelve months and the two or three years before that.
• Gross margin or gross profit by customer, from direct cost rather than a flat overhead spread.
• Contract end dates, renewal mechanics, cancellation notice, and any change-of-control or assignment clause.
• Renewal history: whether the account renewed, rebid, or extended, and whether the price held.
• Price increases: when you last raised the large accounts, whether they accepted it, and any concession in a side letter.
• Whether the founder owns the relationship: who the customer calls, who else has met them in the last year, and what happens on a Tuesday you are away.

They will also ask what share of pipeline, backlog, and the quote log sits with the same names. Last year's invoices can look wide while next year's work does not, so show both.

Tie the schedule to the general ledger before the first meeting. If a few names must wait until exclusivity, label them Customer A and Customer B with the economics attached, and agree on that sequence before you go to market.

Also disclose a most-favored-price clause, a volume rebate, consignment, a right to match, and any email that held price outside the contract file.

What Actually Narrows the Discount

Buyers pay more when the risk is already smaller. A promise to shrink it after they wire the money is not the same evidence.

Multi-year contracts help when they are signed, when renewal is not optional on short notice, and when counsel has read the language. A fifteen-year handshake is a fact about the past. If the customer will not sign a term, report the relationship as it is. An unsigned draft is not a contract.

A second person helps when the customer already knows them. An account manager who has run the quarterly review for a year is evidence. A name added the month you hire an advisor is a plan. Buyers can tell the difference on one call, and many will ask for that call once they are exclusive. The relationship that moves the price has to run without you.

Diversified margins help because the profit is not trapped in one account. If the two best-margin customers are also the two largest, say so and show the next tier before diligence finds the gap.

A slide that says you will diversify after closing does not count. The buyer is paying for the book that exists on closing day. New accounts that have invoiced for several quarters, at margins you can show, are evidence. A target list and a newly hired salesperson are preparation. They are not yet a smaller share.

Changing a share of this size belongs on the 12–36 month sale-prep roadmap. If you are closer to a process than that, tell the truth about the numbers and negotiate structure with that truth in view.

Special Cases Buyers Read Differently

Name the case you actually have. A buyer will reclassify the page if the label is wrong.

Government and reimbursement

Hundreds of names on an invoice list can still be one payer. Medicare, Medicaid, a state agency, a school district, a city, or a federal prime can be the customer that matters. Losing a bid, a rate, a panel, or a contract vehicle is the same economic event as losing an account, and it can arrive on a calendar you do not set.

A Florida Medicaid relationship, a Texas school-district bid, and a federal contract on a national rebid schedule are three versions of one question: who can turn the revenue off, and when. Show the vehicle, the option years, the rate history, and whether you are the prime or a subcontractor. If a fee schedule sets the price, say so. Counting patients or job sites as separate customers does not change a single payer.

A distributor who is not the end user

When one wholesaler, dealer, or marketplace is a large share of revenue, the buyer will ask whether that party is the customer or the pipe. If the distributor can switch suppliers and the stores follow, you are concentrated in the distributor. If end users specify your product, the risk sits further down the chain, and you should show that specification in writing.

Bring sell-through if you have it, the agreement term, and whether a competing line sits beside yours. A marketplace that can change its fee or placement by policy is one customer, whatever the buyer count on the far side of the screen.

Project revenue that bunches up

A contractor, a fabricator, an engineer, or a professional firm can show one customer as a huge share of a single year because several jobs landed together. One trailing twelve months will misread that year. Several years of job history, tied to revenue, usually will not.

If the same names are large every year, that is concentration, even when each year was a different project. A spike in one year can be timing when the job log shows the names rotating. Backlog in that same name belongs on the page with the history.

A strategic buyer who is the customer

Sometimes the buyer is the large account, or the parent of it. They may pay more. They already know the work, they may capture a margin they were paying you, and they do not have to guess whether the relationship transfers. They also know your cost. They can slow a process while you are exclusive with someone else, and other buyers may bid more cautiously once they learn the largest customer is also bidding.

Treat that meeting as one path. The party who can take the account away should not be the only party who has seen the file, unless you have decided, with advice, that a one-buyer conversation is the sale you want. If you take the meeting, decide in advance which cost and margin figures they receive before you know they are serious. How a strategic and a private equity firm differ on price, and on what you give up, is the longer piece linked above.

What to Do in the 12 to 36 Months Before a Sale

If one account is large enough to reprice the buyer you want, keep the customer. That account is earnings. Dropping it to improve a ratio can shrink EBITDA and leave a cleaner percentage on a smaller company. Change the share by growing the rest of the book, and change the risk by making the relationship transferable.

Add accounts, and let them age. A customer that has invoiced for several quarters, at a margin you can document, changes the share. A logo signed last month changes a slide. Aim at work that sits credibly beside the large account and that does not all depend on the same end market. Track the share each quarter so new invoices are not mistaken for a smaller concentration.

Put the relationship on paper. Term, price, renewal, and, where counsel says the customer will accept it, assignment or change-of-control language. Do this while the relationship is calm. Asking for a signature because a sale is underway can tell the account that a process has started. If they will sign only a short renewal, take it and record it. A real one-year term beats a longer term that exists only in a draft.

Get a second person the customer already knows. Put that person on the calls, the site visits, and the email long enough that closing day is not an introduction. A founder who will not share the relationship is telling the buyer that the earnings and the owner are one asset. Choose someone who can stay after you leave.

If you are inside a year of going to market and the share is still large, skip the claim that two more quarters will fix it. Build the schedule, state the term and the margin as they are, and decide which structures you will accept before a buyer writes them. An earn-out on a named account can bridge a real disagreement about risk. It is a weak cover for a relationship that lives only in your phone.

Owners who want this read before a buyer does can start with the seller overview or M&A advisory. The schedule and the second relationship are easier to build before the first teaser goes out.

Talk With Bridge Point

If you are planning a sale around $20 million or more and one customer, or a handful of customers, is a large share of the book, Bridge Point Advisors can help you see how a buyer will price that risk and what is still worth doing before a process starts. Start with a valuation, M&A advisory, or contact us. Call (352) 515-0226.