Client concentration is one of the first issues buyers examine when assessing an LSP. It is rarely the only problem in a deal, but it is almost always the one that raises immediate concern. A single large client can be a competitive advantage while you own the company. During M&A, it becomes a structural liability.
Understanding how buyers quantify this risk—and price it—helps you anticipate objections and avoid costly surprises late in the process.
Why Client Concentration Raises Red Flags in M&A
Buyers invest in future cash flow based on past performance. Heavy reliance on one client makes that future cash flow harder to predict and harder to defend.
If 30 or 40 percent of revenue depends on a single relationship, the entire valuation rests on the assumption that relationship continues. Even when the client has been stable for five or ten years, buyers will immediately ask: What happens if priorities shift, budgets are cut, internal teams are built, or the key contact leaves?
From a buyer’s perspective, this centers on quantifying downside risk in a transaction where they cannot control the single biggest variable.
What Buyers Mean by “Too Much” Concentration
The market has developed clear patterns around acceptable thresholds.
When one client represents 20 to 25 percent of total revenue, questions start appearing in diligence. Above 30 percent, concern increases sharply and begins to affect deal structure. At 40 percent or more, most buyers—especially financial buyers—will treat it as a fundamental structural issue that must be addressed before closing.
Context can soften the blow. Multi-year contracts with automatic renewals, diversified service lines across the account, deep integration into the client’s systems, or a strong track record of client retention in your sector all help. But concentration itself rarely disappears as a factor. It just becomes something that can be priced or mitigated rather than something that kills the deal outright.
Why LSP Owners Consistently Underestimate the Risk
Owners see history and relationships. Buyers see scenarios and volatility.
Founders point to a decade of repeat business, mutual trust, and continuous growth with the client. All valid. All real. Buyers, however, focus on what happens in situations they cannot control—and their purchase centers on exposure to those situations.
They ask whether the client would stay after the ownership change. Whether pricing could come under pressure once the founder steps back. Whether the relationship is institutional or personal. Whether competitors have tried to displace you and failed, or simply have not tried yet.
These questions are financial rather than emotional. And the answers directly affect what the buyer is willing to pay.
How Client Concentration Directly Impacts Valuation
High concentration almost always reduces enterprise value or shifts consideration to performance-based mechanisms.
Buyers may apply a valuation discount to reflect the incremental risk—often 10 to 20 percent off what they would otherwise pay. They may structure a larger portion of the purchase price as earn-outs tied specifically to client retention, meaning you only receive full value if the relationship holds. They may introduce longer payment terms or escrow holdbacks to protect themselves if the client leaves within the first 12 to 24 months post-close.
In some cases, the deal still happens but on materially less favorable terms. In others, the buyer decides the risk is unacceptable and walks away entirely.
Client concentration reshapes the economics of a transaction—often significantly—even when it doesn’t kill the deal outright.
What Buyers Will Ask About Your Largest Client
Expect detailed, methodical questioning during diligence.
Buyers will want to understand how the relationship originated, how long it has existed, and whether growth has come from expanded scope or simply volume. They will ask about contract terms: duration, renewal mechanisms, termination clauses, notice periods. They will examine pricing structures to understand whether margins are sustainable or artificially compressed to retain the account.
They will probe how dependent the client is on your specific capabilities versus how easily they could shift to a competitor or bring services in-house. They will ask who manages the relationship day-to-day, how involved the founder is, and whether the client has met other members of the leadership team.
When the relationship appears personal rather than institutional, the perceived risk increases—and the buyer will more likely require the founder to stay involved post-deal.
Operational Risks Tied to a Single Large Client
Concentration affects both revenue and operations.
Large clients often shape your entire business model. Workflows are optimized around their requirements. Staffing levels fluctuate with their project cycles. Technology investments are made to serve their specific needs. Pricing across the rest of the portfolio may be distorted to accommodate custom pricing or service-level commitments on the large account.
If that client leaves or significantly reduces volume, the operational impact can be severe. You may have overcapacity you cannot redeploy. Fixed costs that no longer make sense. Systems or certifications that lose their value.
Buyers model these scenarios carefully. Even when current financials look strong, the fragility beneath the surface affects what they are willing to pay.
What Happens When the Client Is Tied to the Founder Personally
This is one of the most difficult dynamics in LSP M&A—and one of the most common.
If the key client relationship exists primarily because of the founder’s personal credibility, industry reputation, or decades-long connection with decision-makers, buyers will question whether it survives a change in ownership and leadership.
This concern is grounded in experience. Buyers have seen it happen. A founder exits, the client’s key contact retires or changes roles, and six months later the account is in play.
When this risk is identified, it almost always leads to requirements for the founder to stay on during a transition period, often 18 to 36 months. It may also drive earn-out structures heavily weighted toward client retention, or requests for the founder to formally introduce the buyer and remain visibly involved in the relationship even after stepping back operationally.
The risk here is that the founder’s continued involvement becomes mandatory, and the terms of that involvement become part of the negotiation rather than an afterthought.
How Buyers Structure Deals to Mitigate One-Client Risk
Buyers rarely walk away from concentration risk if everything else is strong. They price it and protect themselves.
Common mechanisms include:
- Client retention earn-outs – A portion of the purchase price is paid only if the key client remains active and maintains a minimum revenue threshold for 12, 24, or 36 months post-close.
- Deferred or escrowed payments – Part of the consideration is held back and released only after the client relationship has been successfully transitioned and stabilized under new ownership.
- Revenue or EBITDA earnouts with client-specific triggers – The seller earns additional value only if overall financial targets are met, which implicitly requires retention of the largest account.
- Formal client engagement during diligence – Some buyers insist on meeting key clients before closing, or at least receiving written confirmation that the relationship is stable and transferable.
These structures shift risk back to the seller. They protect the buyer while delaying value realization and introducing performance pressure that many founders underestimate going into the deal.
What You Can Do Before a Deal to Reduce Concentration Risk
Client concentration cannot be fixed overnight, but even incremental progress during the 12 to 18 months before a sale can materially improve your position.
- Diversify the client base, even modestly. Adding a few mid-sized clients or growing the long tail reduces the percentage the largest client represents. The goal is progress and direction rather than perfection.
- Strengthen contracts with your key client. Multi-year agreements, auto-renewal clauses, and longer notice periods all reduce perceived risk.
- Reduce personal dependency. Ensure other senior team members are actively involved in managing the relationship. Introduce them to key stakeholders. Make the relationship institutional rather than individual.
- Document the relationship. Show a history of consistent renewals, predictable growth, or formal feedback demonstrating satisfaction and integration. Buyers trust patterns over promises.
- Build clear reporting that tracks growth outside the key client. If 40 percent of revenue comes from one client but that percentage was 50 percent two years ago, the trend matters. Buyers look for trajectory alongside snapshots.
Even incremental progress changes the conversation from “this is a problem” to “this is being actively managed.”
When Concentration Is Acceptable and When It Is Not
Concentration takes different forms with different implications.
Highly specialized LSPs serving a narrow vertical, a specific technology platform, or a regulated industry may naturally rely on a small number of large clients. Buyers familiar with that niche—especially strategic buyers already operating in the space—may accept the concentration as part of the business model.
The difference is intent and understanding. When concentration results from a deliberate positioning strategy backed by deep expertise, long-term contracts, and strong client integration, it can be defended.
Problems arise when concentration is accidental, unmanaged, or poorly understood by the owner. When it happened because one client grew faster than expected and no one thought to address the imbalance. When the founder cannot articulate why the client stays or what would happen if they left.
Knowing which situation you are in—and being honest about it—is one of the most important steps in preparing for a sale.
Final Thought
Client concentration always factors into buyer assessment, even when it doesn’t kill a deal.
Buyers will identify it, quantify it, and price it—whether you address it proactively or leave it unmanaged. The question is whether you control that conversation or whether it controls your deal terms.
If you know you have concentration risk, hoping it doesn’t come up is the worst strategy. The best strategy is understanding exactly how buyers will see it, preparing a credible response, and taking steps—however incremental—to reduce the exposure before you go to market.
All risks can be managed, even when they cannot be eliminated.
