Customer concentration is a credit problem before it is a price problem. Measure it by decision-maker across thirty-six months, in revenue and in gross margin. Then read what the largest accounts are actually obligated to do: termination rights, renewal windows, consent clauses, and who signed. Then choose one structural protection for one named account.
How do I measure customer concentration before I argue about price?
Concentration is measured by decision-maker, not by invoice. Pull thirty-six months of revenue and gross margin by customer from the accounting system, combine entities that answer to one parent or one buying committee, and chart the top ten by year. Stable concentration and accelerating concentration are different risks.
Ask for these:
- Revenue by customer by month for thirty-six months, exported from the accounting system, not retyped into a summary.
- Gross margin by customer for the same period, with the direct labor and materials charged to those jobs.
- A parent-child map: every billing entity, who decides whether to keep buying, and first and last invoice dates for the top ten.
The working rule is simple. One decision-maker equals one account. If three subsidiaries are billed separately but one procurement office decides, the business has one customer at thirty-nine percent, not three at thirteen. A memorandum reporting largest customer: fourteen percent may be counting billing entities rather than buyers. Test it against the map; every conclusion downstream inherits the error.
Then look at movement, and at margin. An account that has run eighteen, twenty-five, thirty-one percent means the growth you are being sold is concentration. An account won on price can be thirty percent of revenue and twelve percent of gross profit. The reverse is worse.
Revenue history is evidence of habit. It is not evidence of duty. Only the paper creates duty.
Is there a contract at all, or just a run of purchase orders?
A run of purchase orders records past buying and promises no future volume. Where goods are sold, the Uniform Commercial Code as adopted in the governing state supplies defaults: a quantity term measured by the buyer’s requirements means actual good-faith requirements, and a contract for successive performances indefinite in duration may be ended on reasonable notification.
Read those defaults with their limits. No quantity unreasonably disproportionate to a stated estimate, or to comparable prior requirements, may be demanded. The termination default applies only if the parties have not agreed otherwise, and a waiver of notification fails only where its operation would be unconscionable. Article 2 reaches goods; a services relationship runs on state common law and on whatever the parties wrote.
Law: U.C.C. 2-306(1); U.C.C. 2-309(2)-(3), as enacted in the governing state.
The question is not what the largest account bought. It is what document, if any, obliges it to buy tomorrow. Three patterns show up at this size: nothing signed, where the customer may leave on Tuesday owing only for orders already accepted; a master services agreement that fixes terms but leaves volume open; and a real contract with a term, a minimum, and notice. Only the third carries weight on price, and only for its term.
I ask for the customer contracts before I ask for the add-backs. I read the signature page and the termination clause before I read the pricing.
What in the customer paperwork lets the largest account leave?
Termination for convenience is the clause that matters most, because it lets the customer end the relationship without any fault by the business, usually on stated written notice. Auto-renewal, anti-assignment, pricing promises, and the identity of the signing party do the rest of the damage. Read each against the account.
| Clause | What to find in the document | What it means for you |
|---|---|---|
| Termination for convenience | Whether it exists, who holds it, the notice period in days | Thirty days convenience termination means a thirty-day contract. Price it that way. |
| Term and auto-renewal | Renewal length, and the window for notice of non-renewal | A window opening ninety days before expiration can close during diligence. Calendar each date from the stated expiration. |
| Anti-assignment | Whether it reaches transfers “by operation of law or otherwise,” whether consent may be withheld for any reason, and whether a barred assignment is void or merely a breach | In an asset purchase, moving a restricted contract needs consent. Asking tells the customer a sale is coming. |
| Change of control | Whether a change in ownership is itself a termination or consent event | This can catch an equity purchase even when nothing is assigned. |
| Pricing promises and side deals | Most-favored pricing, rebates, credits, discounts confirmed by email | Raising prices elsewhere can trigger a retroactive claim; inherited rebates never reach the income statement. |
| Signing party | Whether the seller signed personally or for the entity | A contract signed by the individual does not automatically travel with the entity or the assets. |
Does my deal structure trigger the customer’s consent right?
An asset purchase moves contracts by assignment, so a contract restricting assignment needs consent; without a restriction, most commercial rights are assignable. Buying the seller’s equity leaves the contracting entity in place and avoids assignment, but a change-of-control clause, or one reaching transfers “by operation of law,” can still be triggered.
Delaware decisions show both edges. They control only where Delaware law governs the contract, and your customer paper may name another state whose courts read the same words differently. Merger structures are uncommon at this size, where the choice is assets or equity, but the cases show how courts read clause language. In one, a reverse triangular merger in which the contracting company survived was held not to be an assignment by operation of law under the clause at issue. In another, a clause expressly barring assignment by operation of law covered an amalgamation treated as a merger; the contracting party was merged out of existence and its successor could not enforce a conditional one million dollar payment. Where the clause is silent on operation of law, Delaware courts have found ambiguity and looked at the transfer’s consequences.
Cases: Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 62 A.3d 62 (Del. Ch. 2013); MTA Canada Royalty Corp. v. Compania Minera Pangea (Del. Super. Ct. Sept. 16, 2020); Star Cellular Telephone Co. v. Baton Rouge CGSA (Del. Ch. 1993), aff’d, 647 A.2d 382 (Del. 1994); Tenneco Automotive Inc. v. El Paso Corp. (Del. Ch. 2002).
Practical consequence. Every consent request tells the largest customer that the owner is leaving and that you need something; some will reprice. Weigh that against the tax and liability reasons for buying assets.
How will my lender treat customer concentration, and what does the SBA say right now?
Customer concentration is a credit issue before it is a valuation issue. Federal lending criteria require a loan to be so sound as to reasonably assure repayment, and direct the lender to weigh the strength of the business, past earnings, projected cash flow, and future prospects, among other criteria. One account at forty percent sits inside each.
Law: 13 C.F.R. 120.150.
Stated as of September 2026: SOP 50 10 8 took effect June 1, 2025 for applications receiving an SBA loan number on or after that date. SBA published SOP 50 10 8.1 on August 14, 2026, effective October 1, 2026, replacing it on the same loan-number basis. Ask your lender in writing which version governs your file, and read the current SOP rather than any summary, including this one. Three version-specific items, stated as of that date:
- Equity injection. Under SOP 50 10 8, a complete change of ownership requires at least ten percent of total project cost; a seller note counts only on full standby for the life of the loan and may not exceed half the injection. SOP 50 10 8.1 reorganizes the change-of-ownership categories and when a lender may seek less, so confirm the rule in the governing version.
- Independent financial diligence. Under SOP 50 10 8.1, the lender must obtain a quality of earnings report, alongside the required valuation, for initial acquisition and business expansion transactions priced at three million dollars or more. Other categories sit outside that mandate, and below it a lender may still order diligence under its own policy.
- The seller’s continued involvement. After a complete change of ownership the seller may not remain an officer, director, stockholder, or employee. Consulting is allowed for a limited period: twelve months under SOP 50 10 8, up to twenty-four months in aggregate under SOP 50 10 8.1. Partial changes differ. Confirm the limit, then fit your transition plan inside it.
Raise concentration with your lender before you spend money on diligence. Lenders and SBA decide credit; no one can promise you an approval or a timeline. What you can learn early is whether this lender will consider the deal, and at what injection, which sets the ceiling on price.
Which single protection should I take: price, offset, holdback, earn-out, or transition?
Price is the only protection that is immediate, certain in amount, and free of enforcement risk. Everything else is a promise about the future that depends on a document working, a measurement being agreed, and a seller still having money. Rank them, choose one, and attach it to a named account.
| Protection | What it actually does | Where it fails |
|---|---|---|
| Lower purchase price | Reduces the debt you service and personally guarantee | Seller resists hardest here; it is the concession with no upside for him |
| Seller note with offset tied to named accounts | Reduces what you owe if a named customer leaves or drops below a stated level | Needs the note outstanding, and the standby and subordination terms your lender requires must permit the offset |
| Holdback keyed to retention | Withholds a sum, released if the named account still buys at a stated level after a set period | Needs an agreed measurement, an agreed holder, and a definition of “retained” stronger than an existing relationship |
| Earn-out on the named account | Pays the seller more only if the account performs | Contingent price must be cleared with your lender under the governing SOP and cannot be assumed at this size; invites disputes over how you ran the account |
| Transition obligations | Makes introductions specific: named contacts, joint meetings, a date for each | Limited by the SBA consulting window and by the seller’s appetite once his check clears |
If you take one, take price, and use offset or holdback as the fallback. Offset against the seller note is usually the only holdback money in the room, because it is the only part of the price unpaid. Draft the trigger as a number. “Customer A pays less than $X in the twelve months after closing” is measurable. “Customer A is lost” is an argument.
Where does concentration cut against me as the buyer?
Concentration is part of why the business is affordable. A company with one account at forty percent trades at a lower multiple than the same earnings spread across sixty customers, and that discount is why a first-time buyer can reach the deal at all. It is also why the price works.
There is a harder limit. No seller will indemnify you against a customer who leaves for any reason; he cannot control the customer and will not write a blank check against a third party’s free decision. Insurance-backed recourse belongs to larger transactions, so your recourse is the seller’s promises and whatever money is unpaid. A seller can stand behind the past:
- The customer list and revenue figures delivered are accurate for the stated periods.
- The contracts delivered are complete, with amendments, rebate letters, and side arrangements.
- No customer above a stated size has given written notice of termination, non-renewal, or reduced volume.
- No customer holds pricing rights that are not in the delivered documents.
Expect the last two back knowledge-qualified. A qualifier is only as good as its definition, so define knowledge as actual knowledge after reasonable inquiry of the people who handle the account.
You cannot protect every account. Identify the one whose departure breaks the loan, and buy protection for that one.
What should I do this week?
Build the customer table first, because it decides everything downstream. One row per decision-maker, and these columns: three years of revenue, three years of gross margin, percent of total by year, contract or none, termination right and notice days, renewal window, consent needed in an asset purchase, who signed.
Then:
- Request the accounting-system export and the top ten contracts in one written diligence request. If a typed summary comes back, ask again.
- Fill the escape-hatch column yourself, quoting the clause language into each cell.
- Send your lender the concentration figures, and ask which SOP version governs your loan number.
- Name the account you are protecting, and the structure that protects it.
- Put that structure in the letter of intent before diligence ends; a late term reads as a retrade.
Finish with three things on paper: the table, the escape-hatch column, and one protection tied to one named customer. That position can be defended to a seller and to a credit officer.
Authority checked as of September 2026: SBA SOP 50 10 8; SBA SOP 50 10 8.1; 13 C.F.R. 120.150; U.C.C. 2-306; U.C.C. 2-309. SBA procedure is revised; confirm the version governing your loan number.
Keep reading
The Buyer’s LibraryTie the reported revenue to the bank deposits.The Buyer’s LibraryReconcile the add-backs to the filed tax return.The Seller’s LibraryAfter closing, the buyer runs the business your earn-out depends on
Have a lawyer read it before you sign.
A purchase is decided in a handful of documents you sign exactly once — the letter of intent, the note, the indemnity. There is a right time to have them read, and it is before the lender sets your closing date.
Before founding Prencipe International, Joe practiced at the top law firms in the world, including Freshfields Bruckhaus Deringer, Baker McKenzie, Morgan Lewis & Bockius, and served at the U.S. Securities and Exchange Commission. He has spent his career on high-stakes disputes and transactions for businesses that cannot afford to lose. He represents buyers acquiring SBA 7(a)-financed businesses -- reading the letter of intent before it is signed, and the purchase agreement while there is still room to change it.
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