Key points
- No universal threshold applies.
- Top-customer and top-five shares are both examined.
- Contracts and relationship ownership can mitigate risk.
- Diversification takes time.
Concentration is not a bar to selling, but it is a risk buyers examine closely and often reflect in price or structure.
- Share of revenue and gross profit from the largest customer
- Share from the top five and top ten customers
- Whether major customers are under written contracts, and for how long
- Renewal cycles and notice periods
- Who holds the relationship — the owner, or several people
- Customer retention over several years
- Proportion of repeat, recurring or contracted revenue
Definition
Customer concentration
Customer concentration is the proportion of a company's revenue or profit that depends on a small number of customers.
What will a buyer look at?
- Share of revenue and gross profit from the largest customer
- Share from the top five and top ten customers
- Whether major customers are under written contracts, and for how long
- Renewal cycles and notice periods
- Who holds the relationship — the owner, or several people
- Customer retention over several years
- Proportion of repeat, recurring or contracted revenue
Is there a threshold that counts as too concentrated?
There is no universal rule. Acceptable concentration depends on the sector, the contract terms and the strength of the relationship. As an illustration only, a business where one customer provides a third of profit will usually face more questions than one where no customer exceeds a few per cent.
How can concentration be reduced?
Growing other accounts, broadening relationships within major customers, formalising contracts and extending terms all help. Diversification takes time, which is another reason to start preparing early.
A Customer Concentration Calculator is planned for a later phase.
This guide is general commercial information based on professional experience of UK SME transactions. It is not legal, tax, accounting or financial advice, and transaction-specific requirements vary. Take advice from appropriately qualified professionals before acting.
Specialist resources
- Discuss value with an adviser — to understand valuation concerns in the context of your objectives before agreeing any specialist support