How much customer concentration is too much?

Why is a percentage threshold the wrong question?

Buyers ask for a number: 10%, 20%, a third. A single number cannot work, because the same concentration means different things in different businesses.

• Margin matters. Losing a low-margin customer costs less profit than losing a high-margin one of the same size.
• Contracts matter. A three-year contract that can be assigned is different from a purchase order renewed monthly.
• Relationships matter. A customer tied to the company's service is different from one tied to the owner personally.
• Debt matters. A buyer with little debt can absorb a loss that would break a buyer who borrowed 90% of the cost.

The stress test captures all four. It asks one question: can you still pay the bank if this customer leaves?

How do you run the stress test?

1. Get revenue by customer for at least the last two years. Rank the customers.
2. For the largest customer, estimate the profit lost if they leave. Use contribution margin: revenue minus the direct costs that would go away with them. Do not assume all of that revenue is profit, and do not assume none of it is.
3. Subtract that lost profit from the cash flow available for debt service, after a salary for you.
4. Divide by your annual loan payments. Compare the result with 1.25x for an SBA initial acquisition, or 1.15x for a business expansion.
5. Repeat for the top two or three customers combined if they share a risk, such as one industry or one decision-maker.

Worked example

A business has $3 million of revenue and SDE of $600,000. Its largest customer is 25% of revenue. The figures below are illustrative except the multiple and rate.

1. Price at the Q1 2026 BizBuySell average of 2.7x SDE: $1.62 million.
2. Project costs with an assumed $80,000 of fees and working capital: $1.7 million. Injection at 10%: $170,000. SBA loan: $1.53 million.
3. Annual payment at 10% over 10 years: about $242,600.
4. Cash flow after an assumed $120,000 salary: $480,000. Coverage: 1.98x. This passes easily.
5. The top customer's revenue is $750,000. Assume a 30% contribution margin: $225,000 of lost profit.
6. Cash flow after the loss: $480,000 minus $225,000 = $255,000. Coverage: $255,000 divided by $242,600 = 1.05x. This fails.
7. To pass at 1.25x after the loss, annual payments must be no more than $204,000. That supports a loan of about $1.29 million and a price of about $1.35 million, about $270,000 less than the asking price.

Coverage of almost 2x looked safe. One customer made it fragile. The SBA coverage test uses the base case; the stress test is for you.

What can you do when the test fails?

You have three kinds of fix. They are not exclusive.

• Price. Lower the price to the level that passes the stress test. This is the cleanest fix. Show the seller the arithmetic, not an opinion.
• Structure. Move part of the price into a seller note. A note on full standby takes no principal or interest while the SBA loan is outstanding, so it does not count in coverage, but sellers resist it for that reason. A note that is not on full standby counts in coverage at a maximum 10-year amortization. Either way, the seller shares the risk of losing the customer.
• Holdback. Hold part of the price in escrow until the customer renews. On an SBA deal, confirm with your lender and lawyer what form is allowed, because seller earnouts are prohibited.

Outside SBA lending, an earnout tied to the customer staying is common. Earnouts typically run 10% to 30% of value in the lower middle market. SRS Acquiom data shows only 63% pay in full, so sellers tend to discount them.

What should you check during diligence?

• The contract with each large customer: term, renewal, termination rights and any change-of-control or assignment clause.
• Payment history: does the customer pay on time, and has pricing changed?
• Who the relationship runs through: the owner, a salesperson or the company.
• Whether the customer is growing, shrinking or changing suppliers in general.
• With the seller's agreement, near the end of diligence, a call with the customer. Ask about service, not the sale.

Concentration also shapes what you can build later. If you plan to add more businesses, a diversified customer base gives you a steadier base for the next loan or raise.

Where these numbers come from: SBA coverage ratios, seller-note standby rules and the earnout prohibition from this guide to SBA SOP 50 10 8.1 and FunderIntel. The 2.7x Q1 2026 multiple from Beancount's guide to BizBuySell data. Rate cap from NerdWallet. Earnout size and payout data from Livmo, citing SRS Acquiom. SOP 50 10 8.1 applies to loans numbered on or after October 1, 2026; lender practice under it is still settling and these are secondary summaries, so confirm current terms with your SBA lender.

Related questions

Is a large government or corporate customer safer?

Sometimes. They pay reliably, but contracts are often re-bid, and assignment may need approval. Read the contract and find out when it is next re-bid.

Does the lender care about concentration?

Lenders review it, but the SBA coverage test uses historical cash flow, so a deal can pass the lender's test and still fail yours. Run your own stress test.

What about supplier concentration?

Run the same test. Ask what happens to margin if the main supplier raises prices or stops selling to you. Check whether the supplier agreement can be assigned.

Can I ask the seller to introduce me to customers before closing?

Yes, usually late in diligence and with the seller present. Sellers worry about leaks, so agree on timing and script in advance.

What comes next

Concentration is one of several risks that should change your price or end the deal. The next question is what are the red flags when buying a business?

Related articles

• How do you know whether a business can run without its owner?
• What is on a due diligence checklist for buying a small business?
• When should you renegotiate and when should you walk away?
• How do earnouts work in a small business acquisition?
• What are the SBA 7(a) rules for buying a business, as of October 2026?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.