How should a deal be structured when there's significant customer concentration?

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September 23, 2025

by a searcher from University of Pennsylvania - The Wharton School in Philadelphia, PA, USA

Hi everyone — quick questions for the group. First, I’m not sure if there’s a poll function here, but I originally intended to create a poll to gauge how many of you would walk away from — or proceed with — a deal involving high customer concentration. Here’s the context: We’re currently evaluating a manufacturing business with $5M in annual revenue. The top customer accounts for 70% of total sales (i.e., $3M), and the second-largest customer contributes 18% of revenue. I’d love to get your thoughts on the following: 1. Would you walk away or move forward with further diligence? 2. Could this deal realistically secure acquisition financing? 3. If proceeding, what deal structures have you seen (or used) to mitigate this level of customer concentration risk? Appreciate any input or experiences you can share! Thanks!
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Reply by a searcher
from Princeton University in California, USA
Lots of good ideas shared here on how to make it work, but tbh there is just no way that I would buy a business where the top 2 customers account for 90% of revenue. The deal terms would have to be so ridiculously in my favor that if the seller were to accept them, I'd be even more worried.
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Reply by a searcher
from University of Virginia in Charlottesville, VA, USA
Repeating others here for emphasis: finance as much of this as possible with a seller note. Only take on senior bank debt that you can still pay if you lose those 2 big customers. Depending on the nature of the customers and services, maybe you can get them to sign contracts committing to a certain purchase volume for 2-5 years. You don't have to walk away but you definitely have to get creative. I'd be upfront with the seller that customer concentration severely limits your ability to use traditional debt financing. See if they're open to problem solving together, finding opportunities for mutual benefit. E.g. Maybe they're open to entirely seller financing for tax advantages.
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