Jacob Petersen
The Danger of Putting All Your Eggs in One Basket
When you run a successful manufacturing plant, distribution facility, or B2B service company here in Southeast Minnesota, it is incredibly easy to fall in love with your biggest client. They pay on time, they order consistently, and they have likely driven your growth for years. They might be a massive regional healthcare provider, a major agricultural supplier, or a national manufacturer with a local footprint.
But when it comes time to sell your business, that “favorite” client can suddenly become your biggest roadblock.
In my seven years of owning and eventually selling my own accounting practice, and my last ten years as a business broker in Southeast Minnesota, I have looked “under the hood” of hundreds of local companies. One of the most common risks I see is client concentration.
If 30%, 70%, or even 80% of your revenue is tied up in a single customer, you don’t just have a favorite client—you have a target on your back.
How Customer Concentration Affects Business Valuation
Many owners are shocked to find out that a company making $1 million in profits can be worth significantly less than a competitor making the exact same amount.
Why? Because of how customer concentration affects business valuation.
When a professional buyer (whether a strategic acquirer, a family office, or an investor-operator) evaluates your business, they are not just looking at your historical profits. They are buying the probability of future profits. They calculate value using a simple rule: Higher Risk = Lower Multiples.
If a buyer looks at your financial statements and sees that losing one key customer would wipe out 60% of your earnings, they see a massive gamble. What happens if that client goes bankrupt? What if they hire a new purchasing manager who prefers a different supplier?
To compensate for that risk, the buyer will do one of two things:
1 Squeeze the price down by offering a much lower valuation multiple (paying you 1x earnings instead of 3x).
2 Shift the risk to you by demanding a heavy “earn-out” structure, where you only get paid years down the road if that favorite customer decides to stick around.
Building the Bridge: How We Package and Protect Your Value
So, what do we do if you already have a high concentration of revenue? Does it mean your business is unsellable?
Not at all. This is exactly where my role as a business exit guru comes into play. We don’t try to hide the concentration: buyers are far too smart for that, and transparency is our core standard. Instead, we act as a bridge builder, finding common ground and operational stability to mitigate the buyer’s fear.
Here is how we package and protect your value:
1. Hardening Your Client Agreements
We look closely at your client agreements. Are they handshake deals over coffee, or do you have long-term Master Service Agreements (MSAs) or multi-year contracts with transferability clauses? Getting those agreements in writing and ensuring they legally transfer to a new owner immediately lowers the buyer’s risk.
2. De-personalizing the Relationship
Often, the buyer’s biggest fear is that the giant customer only does business with you personally. If you retire, they leave. To bridge this gap, we work to show the buyer that the client relies on your system, your team, and your operational process—not just your personal cell phone number. We document your workflows and highlight key account managers who will be staying on.
3. Designing a Strategic Transition Plan
If the relationship is highly personal, we structure a customized transition. Instead of you handing over the keys and walking away on day one, we might structure a deal where you stay on as a consultant for 6 to 12 months. This gives the buyer peace of mind as you personally transition the relationship, ensuring the bridge we built stays standing.
Prepare Early to Maximize Your Return
If you are planning an exit in Southeast Minnesota over the next three to five years, the best time to address client concentration is right now. By proactively diversifying your customer base or hardening your existing accounts, you can protect the legacy of your life’s work.
Selling your business is one of the most significant financial milestones of your life, but you don’t have to navigate the crossing alone. Work with a Murphy Business Sales advisor to plan your next steps, maximize value, and move forward with confidence.
