Knowing that the largest customer represents 25% of sales is only the beginning of customer-concentration diligence. A buyer also needs to know how much gross profit that account contributes, what work it consumes, and why the customer stays. A small account with excellent margins may matter more to debt-service capacity than a large pass-through account.
Build the account-level evidence
Request monthly revenue by customer for at least the periods used in the acquisition model. Reconcile the totals to the financial statements before analyzing the detail. Group related entities under a common parent where they share purchasing authority. Five invoice names may represent one buying decision.
Next, estimate account-level gross profit using consistently defined direct costs. Mark allocations that are estimates. Separate recurring contracts, project work, one-time orders, and reimbursed expenses. A revenue ranking that mixes these categories can hide the source of repeatable earnings.
Run an actual loss scenario
In a fictional company with $2 million in annual revenue, the largest account produces $500,000 of revenue and $225,000 of gross profit. If that customer leaves, assume only $50,000 of overhead can be removed promptly. Before replacement sales, the operating-profit reduction is $175,000: lost gross profit of $225,000 less $50,000 in removable overhead.
Do not automatically reduce every expense by 25%. Rent, management salaries, software commitments, and minimum staffing may continue. Also model the cash cost of finishing existing work, collecting final invoices, and finding replacement demand. Timing matters as much as the annual total.
Read the agreement, then understand the relationship
Ask counsel to review termination rights, renewal provisions, assignment requirements, and change-of-control language for the proposed transaction structure. A signed contract does not by itself establish that the work will continue under new ownership. Avoid treating an informal seller assurance as customer consent.
Map who maintains the relationship, who approves purchases, and who resolves service failures. If every escalation goes to the departing owner, the buyer is acquiring a transition dependency. Propose an introduction and account-coverage plan with timing agreed through the transaction process; protect confidentiality until customer contact is authorized.
Compare possible responses
One response is to change the price or structure. Another is to require better evidence before proceeding. A third is to keep the economics unchanged because the business still meets the buyer's criteria after the downside case. The right conclusion depends on risk capacity and verified facts, not a universal concentration threshold.
A useful investment memo records the revenue share, profit exposure, termination terms, relationship owner, replacement lead time, and downside liquidity requirement. It also states what evidence would cause the buyer to change the decision.
The SBA's acquisition-planning guidance supports reviewing contracts and cash flow during diligence. Pair this account review with the target-criteria guide so concentration becomes part of the acquisition thesis rather than a late surprise.
Download the working checklist
Download the how to test customer concentration before buying a business worksheet (CSV). Fill it with verified information; blank cells identify work still to be done.