You’re looking at a portfolio company with $20M in revenue and $5M in EBITDA. On the surface, it’s a healthy asset ready for a secondary exit. But dig one layer deeper into the revenue mix, and you find the 'Whale Trap': 40% of that revenue comes from a single logo.
To a founder, a massive client is a badge of honor—proof of enterprise value. To a Private Equity Operating Partner, it’s a single point of failure that turns an asset into a liability. In 2024-2025 due diligence cycles, we are seeing buyers treat high customer concentration not just as a risk factor, but as a direct valuation subtractor.
Here is the hard truth: If one client holds the power to wipe out your EBITDA margin overnight, you don’t own a business; you own a contract. And in the current M&A environment, buyers are pricing that contract at a steep discount. The 'Rule of 10%'—where no single client exceeds 10% of revenue—is no longer just a best practice; it is becoming the gatekeeper for premium multiples. Violating it doesn't just hurt the deal structure; it often kills the deal entirely.
We analyzed recent lower-middle market private equity transactions to map the specific impact of concentration on exit multiples. The data reveals a non-linear degradation of value. It's not a gentle slope; it's a cliff.
Furthermore, market reports highlight that losing a major customer during a sale process is catastrophic, often ending the transaction immediately. Even if the customer stays, the threat of their departure allows the buyer to re-trade the deal at the eleventh hour, compressing your multiple under the guise of 'risk mitigation.'
For further reading on how these operational risks compound, review our analysis on exit readiness checklists that go beyond the financial statements.
You cannot simply 'sell your way out' of a concentration problem 12 months before an exit—net new revenue takes too long to ramp. You need structural fixes that re-engineer the risk profile of the revenue you already have.
If your whale client is a massive enterprise (e.g., GE, J.P. Morgan), do not treat them as one P&L entity. Aggressively map the account to identify distinct buying centers, budgets, and decision-makers. If you can demonstrate that the $5M in revenue actually comes from five distinct business units with separate P&Ls, you can often successfully argue against the concentration penalty in due diligence. You are turning one whale into a school of fish.
Paradoxically, you should consider raising prices on your largest customer. If they are truly high-risk, they should yield higher margins to offset that risk. If they leave, you shed low-quality revenue that was inflating your risk profile. If they stay, you have improved the unit economics and proven the 'stickiness' of the relationship to future buyers. This is a core component of defending your valuation multiple.
Exchange pricing concessions for duration. If a client represents 25% of revenue, move them from an annual renewal to a 3-year committed contract with strict 'termination for cause' only clauses. A buyer will tolerate high concentration if the revenue is contractually guaranteed for the duration of their initial hold period.
Don't let a single relationship dictate your firm's destiny. As we discuss in our guide on tribal knowledge, the most valuable firms are systems-dependent, not person- or client-dependent.
