How to protect yourself from the #1 acquisition killer

(You must do this during due diligence)

Author

Ben Kelly
April 24, 2025

On Tuesday, I introduced you to the idea of customer concentration…

And why it’s one of the most dangerous risks you’ll come across when buying a business.

(If you missed Part 1, you can read it here.)

Today, I’ll show you how to spot high customer concentration during due diligence, and how to protect yourself against it:

1) Get a breakdown of their customers

Most sellers won’t show their customer concentration numbers voluntarily.

So you’ll need to ask them for a breakdown of:

  1. Their current clients

  2. The revenue generated from each client

  3. The longevity of those clients (how long they’ve been with the company)

In off-market deals, the seller might not even know what percentage of revenue comes from what client. Regardless, they’ll need to figure it out and get that list to you.

2) Analyze the relationship between the customers and the seller

Once you have the list, check to see if any client makes up 10% or more of total revenue.

If so, look closely at their relationship with the seller.

Make sure that the relationship can transfer, meaning that the client will stick around after the seller exits.

If the relationship is personal or built on loyalty (friends, family history, etc.), there’s a real risk they’ll walk once the business changes hands.

Customer longevity is also super important.

Let’s say no single client brings in more than 10% of revenue. But, none of them have been with the company longer than a year.

I only buy businesses that are at least five years old... so if all the clients are new, that indicates high turnover, which is another red flag.

3) Review the customer contracts

After you review the list, look at the individual customer contracts to see:

  • What are the renewal dates?

  • What are the terms?

  • Are you able to change the pricing?

This is your chance to find out ahead of time whether a contract is about to expire, or lock you into bad terms.

4) Put contractual protections into place

You’ll need an attorney for this part.

Have them include representations and warranties confirming that the customer list and revenue breakdown are accurate.

You can also structure earnouts or bonus payments based on client retention.

(If key customers stay, the seller gets paid. If not, they don’t.)

Get all of this in writing and outline exactly what the seller is responsible for post-close, like:

  • Personally introducing you to major clients

  • Staying involved for a set period (e.g. 6 months)

  • What tasks they need to do and how many hours they need to work per week

This incentivizes the seller to make the handoff smooth and painless for you.

That’s it for this week!

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Onward,

— Ben Kelly