How lenders assess customer concentration

Concentration is a survival question, not a tidiness question

Buyers tend to hear customer concentration as a criticism of the business. It is not. Owner-managed businesses in the sectors we cover are concentrated almost by definition, because the way a small contractor grows is by doing more work for people who already trust it.

The lender is asking something narrower. If the largest customer stopped buying the month after completion, would the business still cover the repayments? Everything below is the machinery for answering that one question.

The measures that actually get run

Concentration is not a single number, and a credit paper will usually carry several cuts of it.

Largest customer as a share of revenue. The headline, and the least informative of the set.
Top five as a share of revenue. A better shape, because it shows whether the risk is one relationship or a small club.
The same two cuts by gross profit. This is the one that changes minds, and it is covered on its own below.
Contract cover. How much of the top customers' income sits under a signed agreement with a term left to run, rather than under a habit.
Tenure. How long each of them has been buying, which is the closest thing to evidence that they will carry on.
Concentration behind the customer. One buying group, one framework, one main contractor or one introducer can be the real single point of failure even where the customer names look varied.

That last one catches people. A maintenance business with forty sites can still be a one-customer business if all forty sit under one national agreement, and a business fed entirely by one introducer has concentration that never appears in a customer list at all.

Revenue concentration hides the real problem

A large customer is very often a low-margin customer, because that is usually how the volume was won. Measured on revenue it looks alarming. Measured on gross profit it can be nearly irrelevant, and losing it might barely move the figure the debt is serviced from.

The reverse is worse and much more common than buyers expect. A customer that is a modest share of turnover can be a large share of profit, because the work is specialised, priced properly and delivered by people who are already on the payroll. Losing that one does real damage while the revenue chart barely twitches.

Worked exampleTake a business turning over 2 million with two large customers. Customer A buys 600,000 of low-margin installation work at a tenth margin, so it contributes 60,000 of gross profit. Customer B buys 200,000 of specialist service work at a half margin and contributes 100,000. On revenue, A looks like the risk. On gross profit, B is worth almost twice as much, and B is the one whose loss would move the repayment arithmetic.

Produce both cuts yourself. A schedule that shows revenue and gross profit side by side for the top customers is quicker to read than the accounts, and it signals that the person selling the business understands where the money actually comes from.

The mitigants that carry weight

Concentration on its own rarely decides anything. What decides it is what sits around the concentration.

A contract with a term left to run, rather than a rolling arrangement anybody can end on a month's notice.
Long tenure. A customer in its twelfth year is a very different proposition from one in its second, whatever the paperwork says.
Depth of relationship. Several contacts, several sites or several departments buying, rather than one person who happens to like the outgoing owner.
Switching cost. Equipment installed, systems integrated, accreditations held, compliance records the customer would have to rebuild elsewhere.
Headroom. A structure that still services the debt in a downside case where the largest customer has gone. This is the mitigant that does the most work, because it answers the question directly rather than arguing about how likely the loss is.

Change of control is the trap inside all of it. A contract with two years left is worth much less if it can be terminated when ownership changes, and that clause appears more often in the sectors on this site than most buyers expect. It is worth reading every large customer agreement for it before heads of terms, not during due diligence.

What high concentration changes

A concentrated business is usually still fundable. What it does is change the shape rather than the answer.

Expect less debt against the same price, more of the consideration deferred and tied to those customers still being there, a longer clawback period than the seller wanted, and possibly a covenant or a reporting obligation attached to the top relationships. Some lenders will want the seller to stay long enough to introduce the buyer properly to each of them, with the introductions scheduled rather than promised.

None of that is unreasonable, and most of it is cheaper to agree while the price is still open. See deferred consideration and earn-outs for how that money is treated, and equity contribution for the other lever that moves when the risk goes up.

The concentration you create by buying

If you already own a business and are buying a second, the lender looks at the combined book, not the target on its own. Two businesses that each serve the same large housebuilder, the same NHS trust or the same national retailer are more concentrated together than either was alone.

That is worth modelling before you go anywhere near a lender, because it can turn a bolt-on that looked like risk reduction into the opposite. See bolt-on acquisitions.

What to put in front of a lender

A concentration pack is short and it is almost entirely mechanical:

Top ten customers by revenue and by gross profit, for at least two years, so the trend is visible.
For each: start date, contract or no contract, term remaining, notice period, and whether there is a change of control clause.
The same list for the buyer's existing business if there is one.
A downside case you produced yourself, showing the position with the largest customer removed.

Volunteering the downside case is the part buyers resist and the part that works hardest. A lender is going to build it anyway, and building it for them means it gets built on your assumptions rather than on cautious ones. Our document checklist sets out where this sits in the wider pack.

Where this leaves you

Concentration is one of the reasons the same business gets a different answer from different lenders. A funder whose template was built for businesses with thousands of customers treats a top-five weighting as an exception to be argued for. A funder that has lent into facilities management or fire and security before knows that this is simply what those businesses look like, and moves on to asking about tenure and contract cover instead.

That is the whole of what we do about it. We know this market, and we know specific people who have funded concentrated businesses in these sectors before, so the same information goes to someone who has seen it work rather than to whoever is nearest. Tell us what the top few customers look like and we come back to you with who can fund it and what they will want to see.