A buyer looks at a business with high customer concentration, where one customer brings in a large share of revenue, and sees two things at once. A relationship that has lasted years, and a single point of failure. Both are true. The work in diligence is finding out which one dominates.
Measure customer concentration properly
The usual measure is the largest customer's share of revenue, and the top five together. It is a starting point, not a conclusion.
Look at gross profit, not only revenue. A customer can be a modest share of revenue and a much larger share of profit, or the reverse. The one that matters for debt service is profit.
Look at the trend. A share that has grown each year means the business is becoming more dependent. One that is falling means it is diversifying. A single year hides both.
Read the contracts. Term, renewal date, notice period and termination rights decide how fast the revenue could disappear. A long contract with a renewal next quarter is not the same as one with four years left.
Ask why the customer stays. Price, switching cost, a key person, or a product only this business makes. The answer tells you whether the relationship survives a change of owner.
How lenders read it
A lender cares about one question. If the largest customer left, could the business still service the debt?
For SBA loans issued a loan number from 1 October 2026, a first-time buyer must show debt service coverage of at least 1.25x on the seller's historical or adjusted earnings. A conventional lender will run its own test. Either way, expect the credit committee to look closely at any customer whose loss would take coverage below its threshold, and to ask what protects against it.
Run that test yourself before the lender does. Take out the largest customer's gross profit, reduce costs only where they would genuinely fall, and see where coverage lands.
How deals share the risk
When buyer and seller disagree about how secure a customer is, the structure can carry the disagreement.
A seller note that adjusts for loss. If revenue from a named customer, or total revenue, falls below a set level within a period after closing, the note is reduced. Tying it to total revenue rather than one customer avoids arguments about why revenue fell.
A standby note tied to retention. The note sits without payments for a period. If the customer is still there at the end, payments begin. If not, the note is reduced.
A larger equity cushion. Less debt means more room in coverage if a customer leaves. It costs the buyer more cash, but it is the simplest protection.
In an SBA deal, any adjustment has to be anchored to history rather than future earnings, because SBA rules do not allow earnouts in a change-of-ownership loan. Agree the drafting with an attorney and your lender before the letter of intent.
Stress-test the covenants before signing
Build the covenant model before the credit agreement is final. Run the scenarios you are most worried about, starting with the largest customer leaving, and check whether each covenant still holds.
If a likely scenario breaks a covenant, negotiate now. Changing a covenant definition after signing is much harder than agreeing it before.
What concentration analysis will not tell you
It will not tell you whether the customer is happy. Talk to them, with the seller's agreement, before closing. A customer that is quietly reviewing suppliers will not show up in the ledger until they leave.
It will not protect a business from losing a customer through poor service after closing either. The transition period is when relationships are most exposed.
Frequently asked questions
What is customer concentration in an acquisition?
Customer concentration is the share of a business's revenue or profit that comes from its largest customer or a small group of customers. High concentration means the loss of one relationship could materially reduce earnings and the value of the business.
How do lenders view customer concentration?
They test whether the business could still service its debt if the largest customer left. Any customer whose loss would push debt service coverage below the lender's threshold will draw close attention from the credit committee.
How can a buyer protect against customer concentration?
Common structures include a seller note that is reduced if revenue falls below a set level after closing, a standby note tied to the customer being retained, and a larger equity contribution to leave room in debt service coverage.
Should concentration be measured on revenue or profit?
Both. Revenue share is the usual headline, but gross profit share shows what the loss of a customer would do to cash available for debt service, which is what lenders care about.
Where CFOLogic fits
In buy-side diligence we measure concentration by revenue and gross profit over three years and model debt service coverage with the largest customers removed. Before the credit agreement is signed, we build the covenant model and run the scenarios, so problems are negotiated rather than discovered. After closing, Navigator tracks coverage the way your lender calculates it.