Evaluating Customer Concentration Risks in ETA

You finally find a business that looks like a great fit. Revenue is steady, the owner sounds ready to move on, and the market is heading in the right direction. You are preparing to sign the NDA and jump into due diligence.

Then comes the risk many buyers underestimate: customer concentration.

In ETA, a company that depends heavily on one client, for example 40 percent or more of total revenue, can quickly become too risky. If that single customer walks away, cash flow drops, debt becomes hard to service, and the entire deal can unravel.

Too often, buyers only uncover this issue late in the process, after weeks of analysis and significant legal costs. By then, walking away is painful.

The good news is that you do not need full access to the data room to sense the risk. By using industry benchmarks and supply chain signals from the outside in, you can get an early read on potential customer concentration before investing serious time and money.

The Silent Threat in Small Business Acquisitions

Customer concentration is the measure of how revenue is distributed across a company's client base. In the lower middle market, businesses often grow by servicing a few key accounts exceptionally well. While this is great for initial growth, it creates a fragile foundation for a buyer.

When you buy a business, you are buying its future cash flows. If 60% of those cash flows are tied to the whim of a single purchasing manager at a large corporation, you aren't buying a business; you are buying a risky contract that could be cancelled tomorrow.

Why Searchers Miss It

Searchers often rely entirely on the Confidential Information Memorandum (CIM) to reveal concentration issues. Brokers know concentration is a red flag, so they sometimes obscure it in initial teasers, using vague phrases like "strong relationships with blue-chip clients."

Smart searchers flip the script. Instead of waiting for the seller to reveal the risk, they proactively assess the likelihood of concentration based on the business model and market position.

Using Industry Benchmarks as a First Filter

Not all industries are created equal. Some sectors naturally lend themselves to high concentration, while others are inherently fragmented. Understanding these dynamics allows you to filter deals faster.

High-Risk Sectors

Industries that service large enterprise clients often suffer from high concentration. If a target company is a Tier 2 supplier in the automotive or aerospace industry, it is almost guaranteed to have high concentration. There are only a few major buyers in these markets.

Similarly, specialized B2B service providers, such as niche marketing agencies or custom software development firms, often survive on three or four "whale" clients.

Low-Risk Sectors

Conversely, businesses that serve the general public or small businesses usually have low concentration. A residential HVAC company, a self-storage facility, or a dental practice relies on hundreds or thousands of small transactions.

Before you inquire about a listing, ask yourself: Who buys this product? If the answer is "Fortune 500 companies," proceed with extreme caution. If the answer is "homeowners in the suburbs," concentration is likely a non-issue.

Following the Supply Chain Data

Even without access to the company's QuickBooks file, you can use supply chain logic to estimate risk. Every business sits somewhere in a value chain. The closer a business is to the "top" of the food chain (i.e., selling to the end consumer), the more diversified its revenue usually is.

The "One-Degree" Rule

Look at who the target company's customers likely are. If they are selling to distributors, how many distributors exist in that region? If they are a manufacturer, are they making a custom part for a specific machine?

For example, imagine you are looking at a commercial landscaping business.

• Scenario A: They focus on high-end residential estates. (Low risk: many potential wealthy homeowners).
• Scenario B: They focus on maintaining highway medians. (High risk: usually one or two government contracts).

By simply analyzing the "About Us" page or the "Services" section of a target's website (if you can find it) or the general description in a teaser, you can deduce the client type.

Leveraging Digital Footprints

In the digital age, businesses leave clues about their relationships.

• Website Testimonials: Does the website repeatedly feature logos from the same three massive corporations? That’s a hint.
• Employee LinkedIn Profiles: Do sales reps list "Managing the Google Account" as their primary responsibility? That suggests Google is a massive portion of their revenue.
• Public Records: For businesses with government contracts, data is often public. You can see exactly how much revenue comes from federal or state entities, instantly revealing concentration levels.

How Mia Helps Searchers See Clearly

This "outside-in" analysis takes time, and time is the enemy of every searcher. You need to screen hundreds of deals to find the one. Doing manual forensic analysis on every teaser is impossible.

This is where Mia changes the game. Our market intelligence platform aggregates data to help you spot these structural risks instantly.

Mia doesn't just show you a listing; it provides context. By analyzing industry codes and market dynamics, Mia helps you understand:

• Market Fragmentation: Is this industry dominated by a few players or thousands of independents?
• Supply Chain Position: Where does this business type typically sit in the value chain?
• Risk Profiles: What are the common pitfalls for businesses in this specific NAICS code?

Instead of guessing whether a manufacturing plant has one client or one hundred, you can use Mia’s insights to understand the probability of concentration before you invest emotional energy into the deal.

Validating Your Thesis in the First Call

Once you’ve done your outside-in analysis, you can use the very first call with the broker or seller to validate your theory without seeming aggressive.

Instead of asking, "What is your customer concentration?" which puts sellers on the defensive, use your research to frame the question.

Try asking: "I noticed that in this specific niche of industrial coating, many businesses rely heavily on one or two major automotive contracts. How has this company managed to diversify its client base compared to the industry standard?"

This shows you are sophisticated, informed, and serious. It forces the seller to address the risk directly, confirming or denying your outside-in estimate.

Don't Let Concentration Catch You by Surprise

The goal of ETA is to buy a durable, cash-flowing asset, not a fragile house of cards. Customer concentration is a structural risk that is difficult to fix post-acquisition. Diversifying a client base takes years, but losing a key client takes minutes.

By evaluating risk from the outside in, using industry benchmarks, supply chain logic, and tools like Mia, you can protect your time and your future investment.

Ready to search smarter?
Start using data-driven insights to filter your deal flow today at www.gomia.ai.

About the author: Sevil Kubilay is the founder of Mia, a market and competitive intelligence platform for companies in fast-moving markets. With 20+ years at Fortune Global 500 companies including Bosch and Siemens, she specializes in market entry, product strategy, and go-to-market execution. Based in Amsterdam, Sevil mentors startups and writes about competitive intelligence and AI-driven growth.