Deal Killer #2: Do You Have a “Whale” Client
Imagine this: You land a massive contract with a blue-chip company. It doubles your turnover overnight. You hire more staff, expand your office, and celebrate “landing the whale.” It feels like the biggest success of your business career.
But when you come to sell that business, a buyer might look at that same contract and see it as your biggest failure.
This is the paradox of Customer Concentration. What looks like “growth” to an owner often looks like “risk” to a buyer. And if that risk is too high, it becomes a Deal Killer.
The “Whale” Problem
In the M&A world, we analyze the “shape” of your revenue. A healthy business has a broad base of clients. A risky business relies heavily on just one or two.
While there is no strict definition, the general rule of thumb for “high concentration” is when a single customer accounts for 20% or more of your total revenue or gross profit.
If you have a “Whale” client contributing 40%, 50%, or even 60% of your turnover, you don’t just have a business; you have a dependency.
Why Buyers Panic
Put yourself in the buyer’s shoes. They are about to pay a significant multiple for your future cash flow.
If they buy your business on Monday, and that Whale swims away on Tuesday, the business they just bought has collapsed. The overheads (staff, rent, leases) remain, but the profit to pay for them has vanished.
Banks and lenders are even more nervous than buyers. Many acquisition lenders have strict policies refusing to fund deals where high customer concentration exists, because the risk of default is too high.
The “Key Person” Double Whammy
Concentration is rarely just about the revenue; it’s about the relationship.
Often, the Whale client is with you because of you. They trust you personally. They have your mobile number. You’ve gone for dinner with their CEO.
A buyer looks at this and asks: “If the owner leaves after the sale, will this client stay?”
If the answer is “I’m not sure,” the value of your business drops significantly. A buyer cannot acquire your personal relationships; they can only acquire the contracts. And if the contract isn’t rock solid, neither is the deal.
Can You Still Sell? (The Good News)
Does having a Whale client mean your business is unsellable? No.
But it does mean the structure of your deal will change.
If you have high concentration, you lose the luxury of a “clean break” exit (where you walk away with 100% of the cash on day one). Instead, a buyer will likely demand mechanisms to share the risk:
The Earn-Out: A buyer might pay 60% upfront, with the remaining 40% paid over 2–3 years only if that major client stays.
Deferred Consideration: Payments are spread out over time to ensure the revenue remains stable.
Basically, the buyer is saying: “I’ll pay you for that big client, but only after I’ve seen them stick around.”
The Dexterity Fix: Managing the Risk
At Dexterity Partners, we identify concentration issues during our Fit to Sell review, long before we go to market. This gives us time to fix, or at least mitigate, the problem.
Strategy 1: Dilution (The Ideal Scenario)
If you are 24 months away from selling, the best fix is simple: grow everything else. Focus your sales efforts entirely on new, smaller clients. You don’t need to fire the Whale; you just need to make them a smaller slice of a bigger pie.
Strategy 2: Contractual Security
If you can’t dilute the revenue, secure it. Move that client from a “handshake agreement” or a 30-day rolling contract to a long-term (2-3 year) committed contract. A buyer will pay much more for guaranteed revenue than for “hoped-for” revenue.
Strategy 3: Delegate the Relationship
Start transferring the day-to-day management of that key account to a senior manager. If the client loves your Operations Manager as much as they love you, the risk of them leaving when you exit decreases significantly.
Summary
Landing a Whale is a great achievement for cash flow, but it can be a heavy anchor for valuation.
The key is transparency. Don’t hide the dependency. If we know about the concentration early, we can structure the story – and the deal – to give buyers the comfort they need to proceed.
Next Step: Look at your top 5 clients. If number one is paying more than number two, three, and four combined, it’s time to talk to us.
FAQ’s
1. What is customer concentration risk when selling a business?
Customer concentration risk occurs when a large percentage of revenue comes from one client. When selling a business, buyers view high concentration as a major M&A risk because the loss of that client could dramatically reduce future cash flow and business value.
2. How much customer concentration is too much for buyers?
In M&A due diligence, most buyers consider customer concentration risky when a single client accounts for 20% or more of total revenue or gross profit. Beyond this threshold, the perceived business valuation risk increases sharply, particularly if the client contributes 40–60% of turnover.
3. Why do buyers discount businesses with a “whale” client?
Buyers reduce the business valuation multiple when a company depends on a single “whale” client because of recurring revenue risk. If that client leaves after completion, the buyer is left with fixed costs and reduced profitability, making the business harder to sustain once they sell my business goals become reality.
4. How does customer concentration affect acquisition finance and lending?
High customer concentration can prevent acquisition finance altogether. Many M&A lenders refuse to provide business sale funding if a single client represents too much revenue, as the risk of loan default becomes unacceptably high if that customer is lost.
5. What is the “key person risk” linked to whale clients?
Key person risk arises when the whale client relationship depends heavily on the business owner. During M&A due diligence, buyers worry that owner dependency will cause the client to leave once the seller exits, significantly reducing deal certainty and valuation.
6. Can I still sell my business if I have a whale client?
Yes, you can still sell your business with high customer concentration in M&A, but your exit strategy will likely change. Buyers will seek risk-sharing mechanisms such as earn-outs or deferred payments instead of a clean, upfront exit.
7. How do earn-outs help manage customer concentration risk?
An earn-out structure allows buyers to manage business sale risk by tying part of the purchase price to the ongoing performance of the whale client. In this M&A deal structure, sellers are paid additional consideration only if the client remains post-sale.
8. How can I reduce customer concentration before selling my business?
To reduce customer concentration, business owners should focus on diversifying revenue as part of preparing a business for sale. A targeted business growth strategy aimed at winning smaller clients can dilute the whale’s percentage and significantly improve buyer confidence.
9. Do long-term contracts increase business value with a whale client?
Yes. Long-term contracts convert risky relationships into guaranteed revenue, which materially improves business valuation. Buyers are far more comfortable paying a premium for contracted income than for revenue based on informal or short-term arrangements.
10. How can a corporate finance advisor help manage customer concentration risk?
A corporate finance advisor provides M&A advisory support by identifying customer concentration early, restructuring contracts, advising on deal terms, and positioning the risk transparently. This proactive approach increases certainty and protects value when selling a business.
