Customer concentration is the percentage of revenue that depends on your largest customer or on a handful of customers combined. A buyer takes this into account because it indicates how stable the revenue remains after the acquisition, once the owner or existing relationships fall away.
In the value drivers scan, customer concentration is one of the eight drivers that buyers weigh, alongside recurring revenue and owner dependency, among others. The reason is simple: revenue tied to one customer is not an asset of the company but of the relationship. If that customer disappears, the result disappears with it. A company of 120 employees where 40% of revenue lies with two customers is viewed differently by a buyer than a comparable company with a hundred customers each representing a few percent — even if the profit is identical.
A buyer looks not only at the percentage, but also at the nature of the relationship. Is there a long-term contract underlying it, or does the customer operate on a verbal agreement that is reconfirmed every year? Is the relationship anchored in the company, or does it mainly run through the owner or one account manager? Recurring revenue with a contractual basis is weighed differently than revenue that must be earned anew each year; the difference between the two is explained on the page about what recurring revenue is worth in a sale. Concentration and the type of revenue are therefore linked: the same 40% with two customers weighs less heavily if that revenue is locked into multi-year contracts than if it is re-tendered annually.
A manufacturing company with 180 employees has supplied three automotive customers for fifteen years, together accounting for 55% of revenue. Margins are healthy and the relationships are stable. Yet this is precisely the type of situation where a buyer asks additional questions: what happens if one customer decides to contract a second supplier, or if a contract expires in two years and is put out to tender again? The underlying sensitivity — how much the indicative bandwidth shifts if this driver changes — is exactly what the scan provides an indication of, not as a prediction but as a direction.
Customer concentration and owner dependency often touch on the same point: the large customer who has been doing business with the owner personally for twenty years. In that case, it is not only the customer that poses a risk, but also the question of whether that customer will accept the transfer to a different point of contact. How that point of contact can be shifted from the owner to the company is addressed on the page about how to become less dependent as an owner. The owner dependency index in the scan maps this separately from the concentration itself, because these are two different risks that happen to often occur together.
Whether and when customer concentration is something to work on depends on the horizon: a sale in five years leaves room to broaden the customer base, a sale in six months does not. That timeline and what is realistic within it is explained on the page about when to start preparing for a sale. Establishing where your own situation stands is faster than a full preparation process: the free test 'how buyer-ready are you' provides an indication per driver with eight questions, including customer concentration, making clear where the bandwidth is most sensitive.
The scan shows how heavily customer concentration weighs in the indicative bandwidth of your own company, without this being a valuation or appraisal. Owner dependency and the quality of management information — more about which is on the page about how to professionalize management information — are, at their core, questions about who performs which task. Which of those tasks can be transferred to people or to AI, and what that means for dependency on specific customers or individuals, is mapped by the work scan on ftetoai.com.