- The concentration percentage is the least useful thing to know: a twenty-year sole-source relationship and a 38% share held on an annually bid contract look identical on the concentration slide.
- Establish whether a stated multi-year term is a true term or one year plus renewal options, who holds the option, and whether a change-of-control provision turns your acquisition into the customer's decision point.
- If the stated retention figure cannot be rebuilt from customer-level data it is an assertion, and a strong headline figure frequently conceals meaningful churn in the tail.
- A supplier holding 90% of a customer's category spend is exposed to a diversification decision; one at 20% is exposed to a consolidation decision, and the two have opposite mitigations.
- Concentration is not a risk in itself but a structure that can be sound or fragile: one customer at 45% under a ten-year sole-source agreement is less risky than 22% across five annually bid accounts managed by a departing founder.
- Ask management which customer keeps them up at night — the answer is frequently not the largest account, and the gap between the two is the most efficiently obtained insight available.
The percentage is the least useful thing to know.
Every process reports it, every memo repeats it, and a business at 38% top-customer concentration can be either the safest revenue in the portfolio or the deal that ends your fund's year, and the number will not tell you which. A twenty-year sole-source relationship on a component the customer cannot easily requalify is not the same asset as a 38% share held on an annually bid contract, and both appear identically on the concentration slide.
What follows is the set of questions that distinguishes them, organised by what each one is actually testing.
Is the revenue contracted, and on whose terms?
- Is there a written agreement with each of the top five, and when was each last renegotiated?
- What is the term, and is it a true multi-year term or one year with renewal options? The distinction is regularly blurred in contract summaries and it is the difference between five years of revenue and one.
- Who holds the renewal option — the customer, both parties, or is it automatic absent notice?
- What is the notice period for non-renewal, and when does the next notice window open relative to your expected close?
- Is there a termination-for-convenience clause, and what does it cost the customer to use it?
- Is there a change-of-control provision? On concentrated accounts this is the clause that turns your acquisition into the customer's decision point, and it is worth reading in the original rather than in summary.
- Is pricing contractual, indexed, or at list? A contract that fixes volume and floats price is a different instrument from one that fixes both.
How long has each relationship actually existed?
- What is the start date of each top-ten relationship? Not the date of the current contract — the date the customer first bought.
- Which relationships predate current management? Revenue attached to a departing founder's personal relationships is a different risk from revenue attached to an institutional purchasing process.
- Has any top-ten customer been lost in the last five years, and what happened? The answer to what happened is more informative than the loss itself.
- Have any been won from a competitor, and on what basis? A customer won on price can be lost on price.
Can you reconstruct the retention number?
- From the underlying customer-level data, can the stated retention figure be rebuilt? If not, the figure is an assertion.
- Is it logo retention or dollar retention, and is the denominator consistent year to year?
- Does the calculation exclude any cohort, segment, or acquired book? Exclusions are usually disclosed somewhere and rarely in the same document as the number.
- What does retention look like excluding the top five? A strong headline figure frequently conceals meaningful churn in the tail, which tells you about the product rather than about the relationships.
What is the customer's own position?
- What share of the customer's spend in this category do you hold? A supplier at 90% of a customer's category spend is exposed to a diversification decision. A supplier at 20% is exposed to a consolidation decision. Both are risks and they have opposite mitigations.
- Is the customer financially healthy? Concentration risk includes the risk that the customer has problems of its own.
- Has the customer been acquired, or is it in a process? A change in the customer's ownership is the most common proximate cause of concentrated revenue disappearing, and it is knowable.
- Who is the relationship owner on the customer's side, and how long have they been in the role? Concentrated relationships frequently rest on one procurement director whose successor has no history with the company.
What is the switching cost, honestly?
- What would the customer have to do to move? Requalification, tooling, regulatory approval, integration work, retraining. Specify it rather than asserting that it is high.
- Has any customer ever moved and come back? This is the strongest available evidence on switching cost and it exists more often than people expect.
- Is there a second-source arrangement already in place? A customer that already qualified an alternate supplier has priced the option and you should assume they will use it.
The relationships that are not arm's length
- Is any top-ten customer also a shareholder, a lender, a related party, or connected to the seller personally? This is disclosed inconsistently and it changes the analysis entirely, because the pricing may not be market and the relationship may not survive the seller's exit.
- Is any customer also a supplier? Circular arrangements in distribution and manufacturing can make both revenue and cost of goods sold look better than either is.
The one to ask management
- Which customer keeps you up at night?
Asked directly, in a room, to the person who owns the relationships. The answer is frequently not the largest account, and the gap between the account that shows up on the concentration slide and the account the general manager actually worries about is the most efficiently obtained insight in this entire list.
The pattern across all twenty-five: concentration is not a risk in itself, it is a structure that can be sound or fragile, and the diligence question is which. A business with one customer at 45% under a ten-year sole-source agreement with a change-of-control consent already obtained is less risky than one at 22% across five accounts, all bid annually, all managed by a founder who is leaving.
The concentration slide tells you the second one is safer. It is not.