An oil producer we brief sells most of its crude to a single refiner. Anyone can read that in their annual report. When we put their briefing together this month, one of the more useful items in it was about the refiner, which had just signed off on a multibillion-dollar pipeline project with a couple of partners.
Good news for the producer or bad? Probably good, since a buyer pouring that much money into its network isn't planning to shrink. I'm less sure than I'd like to be, though. When one customer takes most of your volume, what they decide to build or shut down ends up in your numbers a year or two later, and the only real defense is paying attention to it. A lot of finance teams handle customer concentration risk with one percentage, checked once a year.
How much customer concentration risk is too much?
For a private company there's no legal line. There are conventions, though, and they shape how outsiders will look at you. Public companies have to disclose any single customer worth 10% or more of revenue under ASC 280, although they don't have to say who it is. That 10% mark has turned into the rough point where lenders, buyers and analysts start asking questions, and plenty of mid market companies drift past it without really noticing, often after a strong year with one account.
If you borrow against receivables, your lender may be the first to bring it up. Asset-based lenders routinely cap how much of your borrowing base can come from a single customer's receivables. An ABF Journal explainer uses 20% as its example, with anything above the cap treated as ineligible. A great year with your biggest customer can therefore shrink what the revolver will lend you, which is an annoying thing to learn during the month you need the money.
If you ever raise money or sell, a quality-of-earnings team will ask what EBITDA looks like if the top customer walks, and the answer goes straight into the multiple. We covered how acquirers think about that in what a due diligence checklist leaves out.
The percentage won't warn you
Concentration usually lives on a board slide as one number, updated once a year. It can sit at 18% for three straight years and then fall off a cliff the quarter the customer leaves, without having budged once while the customer was making up its mind.
What does move is the customer's own public record, and most of it is free: earnings calls, 10-Qs, press releases, capex guidance, leadership changes, the local paper writing about a plant. In the briefings we build, news about a client's big customers comes up more often than news about competitors, and it's often the item a CFO does something about. Another client of ours, a materials supplier to aerospace, sends a big chunk of its sales through one engine maker's supply chain. That engine maker spent the summer agreeing to buy one of its own casting suppliers and talking about ramping engine deliveries. Our client never came up in any of that coverage, but it bears directly on what their order book looks like in 2028.
If I had to pick the single most reliable warning sign, it'd be a customer getting acquired, since the new parent usually shows up with its own procurement team and its own preferred suppliers.
Your sales team hears it first
I spent eleven years in sales, and the account team almost always knew something was off before finance did. Maybe a new VP of procurement starts showing up to calls, or a buyer who hasn't touched a part number in years asks for a quote on it, or the plant manager mentions, a little too casually, that they're trying out another supplier. Almost none of that reaches the CFO, mostly because nobody asked and there's nowhere to write it down.
The fix doesn't need a system. Make it easy for the people closest to your biggest customers to tell you what they're hearing, and act on it where they can see it the first couple of times, so they know it didn't vanish into a spreadsheet.
What to do about it this month
- List your top ten customers by revenue, then again by gross margin. They're rarely the same list, and the ones on both deserve the most attention.
- For each, write down where their news comes from. Public companies file every quarter and hold calls. Private ones announce deals and new executives through press releases and trade publications. Setting up alerts one customer at a time gets old fast, which is one reason our briefings track the customers you name for you.
- Ask each account manager for a three-line note on their biggest accounts once a month (anything new, any change in how they're buying, anything that made them nervous) and read those notes yourself.
- Model losing your largest customer in your 13-week cash forecast and your covenant math. Having that number in hand makes the diversification conversation with your CEO a lot more concrete.
- If you have an asset-based line, find the concentration limit in the credit agreement now, and talk to your lender before a strong quarter from one account shrinks your availability.
Diversifying takes years of winning and growing other accounts, and it's worth starting. None of the steps above have to wait for that, though.
CFOmarketIQ watches the news on your largest customers and competitors and sends it to you as a regular briefing, and the first one is free.
Questions CFOs ask about customer concentration risk
What is considered high customer concentration?
A common rule of thumb is any single customer above 10% of revenue. That line comes partly from the public-company disclosure rule under ASC 280. Lenders and buyers often apply their own tests on top, so check your credit agreement for a specific concentration limit before assuming you're fine.
How does customer concentration affect valuation?
Buyers price in the chance that a big customer leaves after closing. That can mean a lower multiple, an earnout tied to keeping the account, or a tougher quality-of-earnings review. A long contract, a history of renewals and relationships that go beyond a single contact on each side all help reduce the discount.
How do lenders treat customer concentration?
Asset-based lenders often limit how much of the borrowing base can come from one customer's receivables and treat anything above the limit as ineligible. Cash-flow lenders weigh it during underwriting and may price it into the loan. Either way, rising concentration can reduce your availability even while sales grow.
How do you reduce customer concentration risk?
Slowly, by winning new accounts and growing smaller ones. In the meantime you manage it: lengthen contracts with the big customer, build relationships beyond a single buyer, follow the customer's public news, and model what losing them would do to cash and covenants so the plan exists before anyone needs it.
A note on all of this: it is general information, not financial, legal or tax advice. Run anything you plan to act on past your own advisors first.