The short answer, explained
A buyer pays for future profit. If a large share of that profit comes from one or a few customers, the future is less certain: the loss of one relationship could change the business's earnings substantially. Market value reflects what a willing buyer and a willing seller, acting at arm's length, would agree, and a reasonably informed buyer will take that uncertainty into account.
Concentration is not automatically bad. A long, contracted relationship with a reliable customer can be a strength. The question a valuer asks is how secure the revenue is, how much profit depends on it, and what would happen if it stopped. The answer is reflected once in the valuation, in whichever place the evidence best supports.
Concentration risk is reflected once, in the place the evidence best supports
What does the evidence say about the key customer?
Specific evidence that some revenue will not continue
Earnings adjustment. Maintainable earnings are reduced.
The risk is real but not specific enough to remove particular earnings
Multiple or rate adjustment. A lower multiple, or a higher capitalisation or discount rate.
The outcome is binary and large enough to change value materially
Scenario analysis. Outcomes such as the customer staying or leaving are assessed and weighted.
The same risk is applied in two places
The risk is counted twice and the value is understated.
A related issue is reliance on key people rather than key customers. Oliver Group, the Valuo practice for restructures, tax and buyouts, covers that in its guide to key person risk.
Why concentration matters to maintainable earnings
Earnings-based valuations start with maintainable earnings: the profit a new owner can reasonably expect to sustain. Our guide to choosing maintainable earnings explains how that figure is chosen.
Concentration puts pressure on the word "maintainable". The valuer will want to understand:
- Revenue and margin by customer over several years, not just revenue. A large customer on thin margins may contribute less profit than its revenue suggests.
- Avoidable costs. If the customer left, which costs would also fall (materials, staff hours, subcontractors) and which would stay (rent, overheads)?
- History. How long the relationship has run, whether volumes are stable, and whether it has survived previous changes of staff or pricing.
- Who holds the relationship. If the customer relationship sits with the owner personally, the risk on a sale is higher.
- Replaceability. How quickly comparable work could be won, given the business's pipeline and market.
Contracts, assignability and change of control
The terms of the relationship are often more important than its size. A valuer, and a buyer's lawyer, will read the contracts for:
| Term | What to check | Why it matters |
|---|---|---|
| Remaining term | Expiry date and renewal options | Short remaining terms give less certainty about future revenue |
| Termination rights | Whether the customer can end the contract for convenience and on what notice | A right to terminate on short notice limits the security a contract gives |
| Pricing | Fixed, indexed or renegotiated, and any volume commitments | Revenue may be secure while margin is not |
| Assignment | Whether the contract can be assigned to a buyer and whether consent is needed | In a sale of business assets, the contract may not pass without consent |
| Change of control | Whether a change in ownership of the contracting company lets the customer terminate or renegotiate | In a sale of shares, this can expose revenue the buyer thought was secure |
| No contract at all | Purchase orders or informal arrangements only | Revenue depends on the relationship continuing |
Whether a particular clause applies, and what it means, is a legal question. Ask your lawyer to review key customer contracts before a sale or a valuation that will be relied on.
How valuers reflect the risk
There are three common ways to reflect customer concentration. A well-reasoned report chooses one main approach, explains why and avoids applying the same risk twice.
| Approach | How it works | When it may suit |
|---|---|---|
| Earnings adjustment | Maintainable earnings are reduced, for example for a customer already lost or very likely to be lost | Where there is specific evidence that some revenue will not continue |
| Multiple or rate adjustment | A lower multiple, or a higher capitalisation or discount rate, reflects greater uncertainty | Where the risk is real but not specific enough to remove particular earnings |
| Scenario analysis | Value or earnings are assessed under different outcomes, such as the customer staying or leaving, and the results are weighted | Where the outcome is binary and large enough to change value materially |
Any multiple, rate or probability used is a judgement that should be explained with reference to this business's facts. A report should not apply a standard concentration discount copied from elsewhere.
Worked example (hypothetical)
This example is hypothetical, with round numbers and illustrative probabilities, to show the scenario approach. The probabilities are not market data.
A business has maintainable earnings of $500,000. Its largest customer generates $400,000 of revenue a year. If that customer left, the business would also save $250,000 of costs that relate only to that work.
| Step | Item | Amount |
|---|---|---|
| 1 | Maintainable earnings if the customer stays | $500,000 |
| 2 | Revenue from the largest customer | $400,000 |
| 3 | Costs that would also be avoided if it left | $250,000 |
| 4 | Profit contribution at risk (2 less 3) | $150,000 |
| 5 | Maintainable earnings if the customer leaves (1 less 4) | $350,000 |
Losing the largest customer would take maintainable earnings from $500,000 to $350,000
- Maintainable earnings if the customer stays$500,000
- Revenue from the largest customer−$400,000
- Costs that would also be avoided if it left+$250,000
- Maintainable earnings if the customer leaves$350,000
Assume the valuer, having read the contract and the history, judges a 70 per cent chance the customer stays and a 30 per cent chance it leaves within the period that matters to a buyer.
| Scenario | Earnings | Weight | Weighted earnings |
|---|---|---|---|
| Customer stays | $500,000 | 70% | $350,000 |
| Customer leaves | $350,000 | 30% | $105,000 |
| Weighted maintainable earnings | 100% | $455,000 |
Weighting the two scenarios gives maintainable earnings of $455,000
- Customer stays: 70% of $500,000$350,000
- Customer leaves: 30% of $350,000+$105,000
- Weighted maintainable earnings$455,000
If the valuer uses $455,000 as maintainable earnings, the concentration risk has already been reflected. Lowering the multiple again for the same possibility would count it twice. The capitalised earnings sensitivity tool can show how value changes across different earnings and multiples.
What owners can do
Many of the steps that reduce concentration risk also make a business easier to sell:
- Document the relationship. Put informal arrangements into written agreements with clear terms.
- Review assignment and change-of-control clauses with your lawyer, and understand what consent a sale would need.
- Spread the relationship. Make sure more than one person in the business manages each key customer.
- Diversify over time. Grow other customers so that no single loss would change the business's prospects dramatically.
- Keep the data. Record revenue and gross margin by customer each year. Buyers and valuers will ask for it; our guide to preparing for buyer due diligence lists what else they request.
Limitations
This page explains valuation reasoning in general terms. It does not set any threshold for when concentration becomes a problem, because none applies to every business. It does not interpret any contract, and it does not cover industries where revenue is concentrated by design, such as businesses that serve a single government funder, where the funding rules themselves become the key evidence. For a business with a very large share of profit from one source, an independent valuation should explain the treatment in detail.
Next steps
- Prepare a schedule of revenue and gross margin by customer for the last three to five years.
- Collect key customer contracts and ask your lawyer to identify assignment and change-of-control terms.
- Use the earnings normalisation worksheet to show earnings with and without the largest customer.
- If you are planning a sale, read valuing a business to sell; if you are buying, read valuing a business before you buy.
Questions
Is there a percentage of revenue from one customer that counts as too much?
There is no fixed threshold that applies to every business. What matters is how much profit depends on the customer, how secure the relationship is, and how quickly the business could replace the work.
Does a long-term contract remove the risk?
It reduces it, depending on the terms. A valuer will look at the remaining term, termination rights, pricing terms, whether the contract can transfer to a buyer and any change-of-control clause.
Can the risk be reflected in both the earnings and the multiple?
Only if each adjustment deals with a different part of the risk, and the report explains why. Reducing earnings for a likely lost customer and then also lowering the multiple for the same possibility counts the risk twice.
Sources
- Market valuation of assets, Australian Taxation Office. Market value is based on the amount a willing buyer and seller would agree to in an arm's length transaction; valuations must be objective and supported by evidence.
- Buy an existing business, business.gov.au. Buyers are advised to review financial records, business operations and legal documents, including agreements and whether the lease will transfer, in due diligence.
Cite or reuse this page
Valuo Insights team (2026). How relying on a few large customers affects business value. Valuo. https://valuo.com.au/insights/customer-concentration-and-business-value/ (updated 14 November 2026).
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General educational information, not financial, tax or legal advice. Worked examples are hypothetical and do not value a real business. A valuation depends on its purpose, the evidence and the agreed scope.