Customer concentration–when the majority of a company’s revenue is comprised by a small group of clients–is a problem in many industries.

Most brokers will define problematic customer concentration as 25 percent or more of their revenue dependent on a single customer. While a strong relationship with a large customer with a proven track record sounds like a good thing, potential buyers still avoid companies with this issue. Here’s why:

No business relationship lasts forever. Markets change. Competitors emerge. Supply chains get disrupted. People move on. Companies get sold. You might not be doing anything wrong–or differently–and you could still lose the business of an important customer. There’s someone, somewhere, figuring out how to do what you do faster, cheaper, and with less friction. It’s just a matter of time.

I know a man who purchased a plant in Tennessee that was the sole supplier of the beechwood for Anheuser-Busch’s beechwood aging process. He had one customer, an industry leader, with Budweiser controlling 40 percent of the market share. They had a solid business relationship and, until 2008, things were great. Unexpectedly, that year, Anheuser-Busch accepted an offer from Belgium-based InBev.

The European conglomerate made many changes that decimated local industries: it moved marketing and advertising to New York firms and decided not to continue buying beechwood from the Tennessee plant. With one stroke of a pen, the business lost all its revenue. The owner sold the real estate for a fraction of what the business had been worth in its prime.

Even long-standing relationships can deteriorate over time. Another owner had a business dispute with his biggest customer. The discrepancy was only about $30,000, but both sides dug in, and the customer filed a lawsuit. The legal fees bankrupted the owner, and the company had significant struggles.

Buyers will discount your business if there’s too much customer concentration. In the case above, the beechwood plant went from highly profitable to zero revenue without notice. No one was willing to buy a company with zero customers and no revenue. Every experienced broker will tell you that buyers look for a diversified customer base, no matter how profitable a company is. A change in ownership often disrupts any loyalty the customer may have had to the previous owner. If it loses a big customer and other customers make changes as well, the company may even become unsellable.

So if your customer base is too concentrated, what are your options? You have three:

1. Prioritize business development. Hire a salesperson, increase your marketing efforts, and work hard for a few years to sign up more customers.Organic growth requires a commitment of time, resources, and capital, and there’s no guarantee of success. You’ll also need to deliver quality products to more companies, which creates a domino effect on capital investment across labor, production, and distribution.
2. Buy another company that broadens your customer base or market. While buying another company requires a financial investment, a strategic acquisition can solve your customer-concentration issue overnight. Even if the company you acquire has the same issue, you’ve cut the concentration by a considerable percentage.
3. Seek out a strategic buyer or investor. In this scenario, you’ll look for a buyer who has the capital to invest and may be trying to solve the same problem you are. Generally, big companies buy smaller companies, and buyers’ goals include expanding market share, diversifying their product offerings, or eliminating competition.

Customer concentration puts your profitability–and even your business’s viability–at risk. A broker with experience in your industry has connections with many motivated, financially sound buyers who may be looking to expand, as well as owners who may be open to a strategic acquisition.

If I can help you understand the value of your business in today’s market, let’s start a conversation.