In business, we love big clients, we love whale. In M&A, we fear them.
To understand why, compare two hypothetical companies that both generate $5 Million in Revenue:
- Company A has 100 customers, each paying $50,000.
- Company B has 2 major customers, each paying $2.5 Million.
While they make the same amount of money today, Company A is worth significantly more.
Why Buyers Discount “Concentrated” Businesses
- Transfer Risk: The biggest fear a buyer has is that your top client is loyal to you, not the company. If you sell and leave, will that client walk away too?
- Pricing Power: When one customer holds 40% of your revenue, they call the shots. They can demand lower prices or longer payment terms, squeezing your margins.
- Catastrophic Risk: Losing one account in Company A is a bad Tuesday. Losing one account in Company B is a bankruptcy event.
How to Handle This Pre-Sale
If you have high concentration, you have three options to protect your valuation:
- Diversify Aggressively: Spend the next 12–24 months hunting “minnows.” Even if they are smaller accounts, adding volume dilutes the percentage of the whale.
- Long-Term Contracts: Try to lock the key client into a multi-year, transferrable contract. A buyer will pay for guaranteed revenue.
- Embed the Team: Ensure the client has deep relationships with your project managers and support staff, not just you. This proves the account can survive your exit.
The Hard Truth:
If you can’t fix the concentration before selling, be prepared for a deal structure that includes an “Earn-out,” where a significant portion of your sale price is held back and only paid if that client stays.