Customer Concentration in a Search Fund Acquisition: When One Customer Accounts for 40% of Revenue

One customer generates 40% of revenue.

That figure will stand out immediately in the FDD. For a searcher, it can have a direct impact on valuation, financing and deal structure.

The key question is simple: how durable is that revenue after closing?

For a material key customer, we would want to understand three things early:

• How easily can the customer walk away?
• What does the change of ownership mean for the contract?
• How dependent is the relationship on the seller personally?

Start with the contract

In the Legal DD, the first points to check are usually term, renewal mechanics and termination rights.

Change of control provisions also matter. Depending on the wording, a transaction may trigger a consent requirement, a termination right or simply an information obligation.

Other relevant points include pricing mechanisms, minimum purchase commitments, exclusivity provisions and material service or liability terms.

If a customer represents 40% of revenue, a required customer consent can become a significant deal issue. Depending on the importance of the contract, obtaining that consent may need to be addressed as a condition to closing.

Look at the actual relationship

The contract only tells you part of the story.

We would also look at how revenue and margin have developed over time, whether there have been major price discussions, complaints or renegotiations, and whether purchasing volumes have remained stable.

The relationship itself matters as well.

If the seller has managed the customer personally for years, leads every commercial discussion and is the first person the customer calls when something goes wrong, there is a real transition risk when the seller leaves.

That should be planned for before closing. Who takes over the relationship? When is the new contact introduced? How long should the seller remain involved?

What does this mean for the deal?

High customer concentration can affect several parts of the transaction.

If consent is required, a closing condition may be appropriate. If the relationship is heavily tied to the seller, the SPA can include specific transition obligations.

The purchase price may also need to reflect the risk. Depending on the circumstances, that could mean a lower valuation, a holdback or an earn-out.

An earn-out is most useful where the relevant post-closing performance can be measured clearly and the mechanics can be defined without creating unnecessary ambiguity.

Bring financing into the discussion early

For searchers, acquisition financing is another important piece of the puzzle.

If one customer accounts for 40% of revenue, lenders will usually want to understand how secure those cash flows are. Short termination periods, no minimum purchase commitments or a relationship that depends heavily on the seller can all become relevant in the financing process.

That is why key customer risk should be reviewed early.

By the time the deal reaches signing, the searcher should have a clear answer to one question:

How stable is the revenue from this customer after closing, and what could realistically put it at risk?

That answer should then inform valuation, financing, SPA mechanics and the transition plan.