How to Check Customer Concentration Before You Buy a Small Business

Customer concentration is the share of a business's revenue that comes from its largest few customers. To check it before you buy a small business, ask the seller for revenue by customer for the last three years, rank the accounts, and work out the share held by the largest one, the largest three and the largest five. Then find out who holds each of those relationships and whether the contracts survive a change of owner.

The SBA's guide to buying an existing business names an established customer base as part of the largest advantage of buying over starting. A concentration check tells you how much of that base is really a handful of accounts, and how much of it is tied to the person selling.

What should a buyer ask the seller for?

Ask for revenue by customer, by year, for the last three years, with each year's total tied to the income statement. Early in a deal a seller may refuse to name customers. A coded list, with Customer A and Customer B in place of names, is enough to work out the shares. Names, contracts and correspondence can follow under a confidentiality agreement once the seller is ready to share them.

Add the request to the document list in the buyer's due diligence checklist. The lender readiness checklist asks for the same three years of revenue by customer, so the record gets used twice.

If the customer report does not add up to the revenue on the income statement, settle that first with the revenue reconciliation worksheet. A share of an unverified total is an unverified share.

How do you calculate customer concentration?

Divide each customer's revenue for the last 12 months by total revenue for the same 12 months, then add up the largest one, three and five. Do it for each of the three years so you can see whether the shares are rising or falling.

The worked example below is fictional. It describes an invented commercial cleaning company with $1,000,000 of revenue in the last 12 months, and none of its figures is a benchmark.

In the example the largest customer holds 22 percent and the largest three hold 46 percent. Customer A grew by $40,000 in a year, so the business has become more dependent on it, not less.

The second half of the worksheet records why each share is safe or not. Give each large account a row with these facts, and keep the source document beside each one.

Customers A and C share a parent company, so one decision controls 31 percent of revenue. The ranking by name showed a largest customer at 22 percent. The ranking by who decides shows 31.

For each large account:

1. Rank customers by revenue for the last 12 months. List every account large enough that losing it would change your offer, and put everyone else on one row.
2. Compare each account with the two years before. Mark accounts that are growing, shrinking or new.
3. Group customers that share an owner, a parent company or a single purchasing contact.
4. Name the person each customer calls when something goes wrong.
5. Record what is in writing: the term, the renewal date, the notice period and any clause about assignment or a change of owner.
6. Note the source document, who will get any missing record, and whether the row is open or closed.

Is there a safe percentage for customer concentration?

No percentage is safe for every small business. The figure repeated most often is 10 percent, and it traces to a disclosure rule for public companies. FASB Statement No. 131, issued in June 1997, told a public company to disclose the fact and the amount whenever a single external customer supplied 10 percent or more of its revenue. The statement said it did not apply to nonpublic enterprises. It set the point at which investors had to be told, not a limit on how concentrated a company may be.

The SEC's disclosure rule for public companies, Regulation S-K Item 101, lists "Dependence on one or a few major customers" among the things a smaller reporting company describes. It names no percentage at all.

A 10 percent customer on a written contract with years left is a different risk from a 10 percent customer who buys because of a friendship with the seller. The site's guide for sellers takes the same position from the other side of the table: there is no universal safe percentage.

What does the percentage not tell you?

The percentage shows how much revenue sits with one customer. It says nothing about whether that revenue will still be there after closing. Four facts on the worksheet answer that.

• Who holds the relationship. A customer who calls the seller's mobile phone is loyal to the seller. That is a form of owner dependence, and it needs a transition plan with names in it.
• What is in writing. A contract with a term and an assignment clause can be read by your attorney. A standing habit of ordering cannot.
• How customers are tied together. Statement No. 131 treated entities under common control as a single customer. A buyer should do the same: three locations of one hospital system are one decision.
• How the account has moved. A large customer that has grown every year reads differently from one that was larger two years ago.

How does an SBA lender look at customer concentration?

On larger SBA acquisitions, customer concentration is now part of the lender's own diligence. Under SOP 50 10 version 8.1, effective October 1, 2026, an Initial Acquisition or Business Expansion with a business purchase price of $3 million or more needs a Quality of Earnings report, and that report must assess the quality and sustainability of the revenue base, including customer concentration risk and contract continuity. The lender then has to use the report's earnings in its debt coverage test.

Below $3 million the SOP does not require that report, but the same question decides whether the cash flow behind the loan is real. A buyer who has already filled in the worksheet can hand the lender the answer before the lender asks.

What should a buyer do with a concentrated customer list?

Price it, plan around it, or decline the deal. Start with the loss case: remove the largest account, or the largest tied group, and rebuild earnings without it. In the fictional example, losing the A and C group takes out $310,000 of revenue, and the question is what is left of earnings once the costs that served those accounts are also removed.

If the business cannot cover its costs and its debt payments in the loss case, the price or the structure has to change. The valuation guide explains where concentration moves a business inside its range.

Then work the transfer. Ask when you can meet the largest customers and how the seller will introduce you. Write those introductions, by customer name, into the purchase agreement. Where the transfer is uncertain, a buyer can ask for part of the price to depend on the accounts staying. On an SBA 7(a) acquisition, SOP 50 10 version 8.1 prohibits seller earnouts but allows a buyer rebate based on business performance, and any rebate the buyer receives must go toward the principal of the 7(a) loan. Have your lender and attorney review any term like that before it goes into the letter of intent.

Stop when the largest customers will not meet you, the contracts cannot be assigned, or the price still assumes revenue nobody can show will transfer. The free Business Buyer Due Diligence Kit has the document request list to carry this into the rest of the review.