The #1 killer of good acquisitions

Let’s talk about the #1 killer of good acquisitions:

Customer concentration.

Most first-time business buyers don’t know to ask about it.

Most sellers won’t volunteer info about it, either because they don’t know, or they’d rather you didn’t ask.

But if you skip analyzing this during due diligence, you could be setting yourself up to have your cash flow quietly gutted after the deal closes.

Here’s what you need to know:

What is customer concentration?

Customer concentration = how a business’s revenue is spread across its client base.

(This is also called “client concentration.”)

For example:

A business might have 10 clients that each bring in 10% of the revenue

Or, 5 clients that each bring in 20% of the revenue.

And so on.

If one client accounts for over 10% of the revenue, that’s generally considered to be a high customer concentration.

Why is customer concentration a big deal?

Everyone knows they shouldn’t put all their eggs in one basket... but that’s exactly what a lot of small business owners do!

Many of them make the bulk of their revenue from just a few big recurring customers.

(I’ve even seen businesses where 70% of their revenue was coming from one client.)

This is not a good thing. If you come across high customer concentration like this while looking at deals, treat it as a huge red flag!

Personally, I won’t touch businesses like this with a 10-foot pole. Even if the clients have been with the seller for 20 years, and they have a great relationship, I just won’t do it.

Because if you take over and those big clients leave?

Most of your cash flow goes with them.

And if there’s no pipeline in place to bring in new leads, you’ll be stranded with no backup plan.

This is especially dangerous for businesses that are only doing $1M to $2M in revenue.

At that size, losing one or two major clients isn’t just a bad quarter…

It can sink the whole ship.

So, what can you do about it?

That’s what we’ll cover in Thursday’s newsletter.

In the next issue, I’ll show you:

• A simple method to find out a business’s exact customer concentration (before you get too deep into the deal)

• Why a business with “evenly spread” revenue can still be risky if all the clients are new

• Why a business having a lot of clients could actually be another red flag

• How to tell whether key customer relationships can actually be handed off — or if they’ll walk when the seller does

• How to protect yourself after closing the deal by using performance-based payouts

In the meantime...

If you’re interested in buying (or passively investing into) a small business, I’d love to hear from you.

Fill out the quick survey at the link below, and tell me your goals, budget, and what topics you’d like to learn more about.

If I come across deals that are a good fit, I’ll send them your way.

👉 I want to buy a business or invest as a silent partner (2-minute survey)

Or, if you want to sell a small business and want me to help you find qualified buyers, let me know here:

👉 I want to sell my business

Onward,

— Ben Kelly