Here's what most business owners don't realize: if one customer represents more than 30-40% of your revenue, your business may not be sellable at all. End market concentration is one of the fastest ways to kill an M&A deal before it even starts.
At REAG, we've guided hundreds of lower middle market companies through successful M&A transactions over our 20+ years of experience. We've seen how understanding your "end market concentration,” essentially, how much power your customers have, can be the difference between a premium valuation and leaving significant money on the table.
Think of it this way: if you manufacture custom parts, are you serving a mix of automotive, industrial, and construction clients who each represent 5-10% of your revenue, or does one major equipment manufacturer account for 80% of your sales? The dynamics are completely different, and so is your business's value to potential buyers.
End market concentration is essentially about customer diversification. While putting all your eggs in one basket might make your basket look full, buyers are asking whether that basket is built to last, or if one crack could leave them with nothing but a mess to clean up.
The reality is harsh: most buyers will automatically walk away from businesses with significant customer concentration. It's not just about lower valuations, it's about whether there's a viable deal at all.
Understanding which type of concentration you have is critical for determining if and how you can become sellable:
Monopoly Markets: Usually a deal killer unless the strategic buyer is the customer themselves
Oligopoly Markets: Can be very valuable IF you serve multiple players; risky if concentrated in just one
Perfect Competition Markets: Lower valuations but still sellable if you have strong operations and margins
This is exactly why REAG partners with Certified Exit Planning Advisors (CEPA®). CEPAs working with the Value Acceleration Methodology™ can identify concentration risk early and help business owners execute diversification strategies, whether through organic growth, strategic acquisitions, or operational changes, giving them 12 months or more to become sellable.
The timeline is critical: 12-18 months minimum for meaningful diversification, 24+ months for acquisition-based diversification. Start immediately. Concentration doesn't fix itself and can make your business unmarketable.
In monopolies, there's essentially one major buyer for your product or service. Think of a defense contractor selling only to the government, or a supplier with one massive customer like Amazon or Walmart. The challenge: Many investment banking firms won't even consider these businesses, viewing the customer concentration as too risky.
REAG's approach: When traditional financial buyers won't consider these businesses, we explore whether strategic options exist, but only after careful risk assessment.
Here’s the reality: approaching your dominant customer about acquisition carries significant risks. They might use the information to renegotiate terms, find alternative suppliers, or even decide to bring your function in-house without acquiring you. This strategy requires extreme caution and should only be considered when other options have been exhausted.
Sometimes the dominant buyer in your market could be interested in vertical integration, owning their supplier rather than just buying from them, but this conversation must be approached strategically with proper preparation and risk mitigation.
What this looks like: Your industry has 3-5 major customers who dominate purchasing decisions — think automotive suppliers serving Ford, GM, and Toyota, or software companies serving the major banks.
Why this matters: If you serve multiple players in this concentrated market, you're actually in a strong position. Buyers will pay premium prices to gain access to these relationships.
The key is positioning your company as a defensive acquisition. Smart buyers realize that if they don't acquire you, their competitors might, which could significantly strengthen that competitor's market position.
Our network of relationships helps us reach the right buyers and create a competitive bidding environment. We could also structure a deal that gives you upside potential if the new owner successfully expands relationships with the remaining major players in your market.
What this looks like: You're competing with lots of other manufacturers who make similar products. Customers have plenty of options, so you have to stay sharp on pricing. No clear differentiator.
The challenge: Without clear differentiation, buyers often see these businesses as commodity plays with lower valuations.
REAG's approach: We help you identify and document the differentiators you might not even realize you have, including specialized processes, unique customer relationships, operational efficiencies, or geographic advantages that can improve your valuation even in competitive markets.
Here's what we recommend:
Start Early: Begin working with experienced M&A advisors and CEPAs 18-24 months before you want to sell. This gives you time to address concentration issues.
Face Reality: If you have significant customer concentration, don't assume it will work itself out. Address it proactively or risk being unmarketable.
Document Everything: Keep detailed records of your customer relationships, contracts, and what makes you unique and hard to replace.
Think Strategically: Consider how your market position could be valuable to different types of acquirers, not just investors looking at cash flow.
Don't let customer concentration kill your exit strategy. The most successful business sales we've facilitated recognize that end market concentration isn't just something that happens to you. It's a strategic issue that must be addressed well before you want to sell.
Whether you need to diversify your customer base, find strategic buyers, or explore creative deal structures, the key is working with advisors who understand these dynamics and won't simply walk away from challenging situations.
For CEPAs: If your client has significant customer concentration, don't wait. The earlier you identify and address these issues, the more options your client will have when they're ready for an exit. Need additional resources? Visit REAG’s CEPA Portal.
For Business Owners: M&A is often misunderstood as a single event, but in reality, it’s a complex process typically spanning 9-12 months or more. Working with a trusted advisor, this process moves through several key stages: initial preparation, buyer identification and outreach, negotiation, due diligence, and finally, closing. Each stage requires careful navigation and expertise to ensure success.
If you’re ready to unlock your company’s true value, reach out to REAG today.